Thanks to IRC Section 1031, a properly structured 1031 exchange allows a real estate 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 real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
How To Do a 1031 Exchange
To understand the powerful protection a 1031 exchange offers, consider the following example:
- Assume an investor has $400,000 in gain and also $400,000 in net proceeds after closing. Assuming an investor with a $400,000 capital gain and incurs a tax liability of approximately $140,000 in combined taxes (depreciation recapture, federal capital gain tax, state capital gain tax, and net investment income tax) when the property is sold. Only $260,000 in net equity remains to reinvest in another property.
- Assuming a 25% down payment and taking on new financing for the purchase with a 75% loan-to-value ratio, the investor would only be able to purchase a $1,040,000 replacementย property.
- If the same investor chose to exchange, however, he or she would be able to reinvest the entire gross equity of $400,000 in the purchase of $1,600,000 replacement property, assuming the same down payment and loan-to-value ratios.
As the above example demonstrates, tax-deferred exchanges allow real estate investors to defer capital gain taxes as well as facilitate 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 Section 1031 code. For instance, an accurate understanding of the key term like-kind – often mistakenly thought to mean the same exact types of real estate property – can reveal possibilities that might have been dismissed or overlooked. Asset Preservation, Inc. (API) is one of the best 1031 exchange companies and 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 Start a 1031 Exchange Online.
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To learn more, watch the 30-minute 1031 Exchange Basics recorded webinar below:
Federally Declared Disaster Extension Information
Click the link below to determine if you may qualify for an extension of your 1031 exchange dates.
https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
See additional info here: https://apiexchange.com/disaster-relief/
Below are some links to articles, manuals, forms, tools, and other 1031 related information.
1031 EXCHANGE BASICS
1031 Exchange Companies Due Diligence
Glossary of 1031 Exchange Terminology
What is a Qualified Intermediary?
Find a 1031 Exchange Expert in Your Area
What is the First Step in a 1031 Exchange?
TOOLS
LOCATIONS
Find a 1031 Exchange Expert in Your Area
1031 Exchange California – Los Angeles
1031 Exchange California – San Diego
FORMS
IRS Form 8824: Like-Kind Exchanges
IRS Form 1065: U.S. Return of Partnership Income
IRS Form 4797: Sale of Business Property
IRS Form 1040, Schedule D: Capital Gains and Losses
CA Form 3840: California Like-Kind Exchanges
IRS Publication 544: Sales and Other Disposition of Assets
NEWS
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Asset Preservation is a member of the Federation of Exchange Accommodators (FEA).