WHAT IS A 1031 EXCHANGE?
Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
To understand the powerful protection a 1031 exchange offers, consider the following example:
- An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
- Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
- If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term like-kind - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked. Asset Preservation is your resource to obtain accurate and thorough information about the entire exchange process.
Asset Preservation would appreciate the opportunity to work with you on your next exchange regardless of how simple or complex. Give us a call at 800.282.1031 to open a 1031 exchange. Or to open a 1031 exchange online, email us at firstname.lastname@example.org.
We have provided some links below to articles, manuals, forms, tools and other 1031 related information to help you start building your 1031 niche.
1031 EXCHANGE BASICS
FAQs 1031 Exchanges
Glossary of 1031 Exchange Terminology
What is a Qualified Intermediary?
The Delayed Exchange
Find a 1031 Exchange Expert in Your Area
1031 Exchange Checklist
1031 Exchange Library
What's the First Step in a 1031 Exchange?
Form 8824: Like-Kind Exchanges
Publication 544: Sales and Other Disposition of Assets
IRS Form 1040, Schedule D: Capital Gains and Losses
Capital Gain Tax Calculator
45/180 Day Calculator
1031 Handouts You Can Customize for Clients
Sign Up to Receive 1031 Exchange News
Asset Preservation is a member of the Federation of Exchange Accomodators (FEA).