Navigating the complexities of real estate investment is an ever-learning process. That is especially true when it comes to understanding and managing capital gains taxes. Fortunately, there are strategies to help investors avoid capital gains tax — the 1031 exchange. Contact Asset Preservation, Inc. (API) to learn more about capital gains tax 1031.
How to Determine Capital Gain Taxation
The familiar adage, “It’s not how much you make, but how much you keep,” rings truer than ever for taxpayers. Capital gain taxes increased significantly for high earners in 2013, and many face an additional 3.8% net investment income tax (NIIT) on passive investment income like capital gains.
Fortunately, IRC Section 1031 — a provision which has been in the tax code since 1921, provides critically needed tax relief. It also helps you avoid capital gains tax.
Under the American Taxpayer Relief Act of 2012, the top federal capital gain tax rate was increased to 20% (up from 15%) for single filers with incomes above $492,300 and married couples filing jointly with incomes exceeding $553,850.
In addition, IRC Section 1411 added a new 3.8% NIIT on net investment income, which includes capital gains.
If this sounds overly complicated, just give us a call at API. Our financial experts would be happy to review where you stand in the capital gains tax rate.
Four Steps Involved in Determining Capital Gain Taxation
Absent the tax-deferral benefits of a 1031 exchange, below is a summary of the four ways taxpayers will be taxed on the sale of investment property:
- Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
- Federal Capital Gain Taxes: Taxpayers owe federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a higher federal capital gain tax rate of 20% has been added to the tax code, taxpayers exceeding the $492,300 taxable income threshold for single filers and married couples filing jointly with over $553,850 in taxable income will be subject to the higher tax rate. The previous federal capital gain tax rate of 15% remains for taxpayers below these threshold income amounts.
- New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% tax on “net investment income.” This 3.8% NIIT applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income, and income from partnerships (as well as other forms of “unearned income”).
- State Taxes: Taxpayers must also take into account the applicable state tax to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.
Capital Gain Tax 1031 Can Defer the 3.8% NIIT and Capital Gain Taxes
Despite high overall taxes owed when combining the four levels of taxation, we detailed in the section above at the disposition of an investment property, one aspect of the tax code provides real estate investors with a significant tax advantage.
Section 1031 exchanges allow taxpayers holding real property for investment purposes to defer capital gains tax that would otherwise be recognized upon the sale of investment property.
How to Defer Capital Gains Taxes with a 1031 Exchange
If you’re looking to avoid capital gains tax, a 1031 exchange can be a highly effective strategy. By using a 1031 exchange, also known as a “1031 tax deferred exchange,” real estate investors can defer the capital gains taxes that would normally be due upon the sale of an investment property. This powerful tax tool allows you to reinvest the full proceeds from the sale into a new property, thereby maximizing your investment potential.
The Importance of Professional Guidance
While the benefits of a 1031 exchange are clear, navigating the process can be complex and requires a thorough understanding of tax laws and regulations.
This is where professional help becomes invaluable. Asset Preservation, Inc. (API) offers expert assistance to ensure that your 1031 exchange is executed correctly, helping you to defer capital gains tax effectively. Our team is experienced in handling all the intricacies involved, from compliance with IRS guidelines to managing timelines and documentation.
Benefits of a 1031 Exchange
- Defer Capital Gains Tax: A 1031 exchange allows you to defer capital gains taxes, which can be substantial. This deferral can free up more capital for reinvestment, enabling you to acquire larger or more lucrative properties.
- Avoid Capital Gains Tax: By continuously reinvesting in like-kind properties through multiple 1031 exchanges, you can defer capital gains taxes indefinitely, essentially avoiding them until you choose to cash out.
- Capital Gains Tax 1031: Utilize the provisions of IRC Section 1031 to minimize your tax burden and keep more of your investment earnings working for you.
The Role of API
At API, we provide comprehensive support to guide you through the entire 1031 exchange process. Our experts will help you understand the potential tax savings and ensure that all transactions are handled according to the law. With API by your side, you can confidently leverage a 1031 exchange to defer capital gains tax and enhance your real estate portfolio.
Contact Asset Preservation, Inc. (API) to start your 1031 exchange and take full advantage of the tax-deferral benefits available to you. Let our professionals handle the details so you can focus on growing your investments.