1031 Exchange Options

1031 Exchange – An easy way to make your money work for you!

IRC Section 1031 enables an accurately structured exchange allowing any investor to trade property and reinvest the profits in a brand-new property and to put off 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.”

Let us understand this in detail considering the following example –
After a deal is closed, you as an investor have $400,000 in gain and $400,000 in net proceeds. Ideally, a $400,000 capital gain incurs a tax liability of approximately $140,000 in taxes which includes federal capital gain tax, state capital gain, tax depreciation recapture, and income tax on net investment, when a property is sold. $260,000 is what will remain in net equity to reinvest in a different property.

Let us consider a 25% down payment and availing on new financing for the acquisition with a 75% loan-to-value ratio, in this case, you will only be able to purchase a $1,040,000 replacement property.
However, if you chose to exchange, you will be able to reinvest the entire gross equity of $400,000 in the purchase of $1,600,000 replacement property, considering the same down payment and loan-to-value ratios.

This changes the game altogether!
As the preceding example explains, tax-deferred exchanges enable investors to defer capital gain taxes as well as promote meaningful portfolio growth and increases return on investment. 1031 exchanges not only empower you, but it also enables your money to churn the maximum profit for you.


What types of 1031 exchange options are available?

Investors commonly assume that delayed exchanges are 1031 exchanges. In delayed exchanges we sell a property first and then buy a property. There is a 180-day period to complete this.

Reverse exchanges are also widely sought after. In a reverse exchange, property is bought before replacing the property to be sold. This too has a maximum period of 180 days. It’s just that it works as a reverse approach towards the goal. There is a 45 days allotted period from acquisition to ID what’s to be sold and a total of 180 days to get it done.

Improvement exchange is also a standard 1031 exchange option. Improvement exchanges enable sponsors to go out and acquire property and literally build the ideal replacement property for an investor.

Another popular type of 1031 exchange options involves a blended transaction, which is like a partial reverse exchange. Sponsors will acquire a property today, sell the same in the future, then the remaining proceeds, what’s left over, will be used in a delayed format going forward so that it can then be used to aggregate a variety of properties in a single acquisition.

The Most Popular 1031 Exchange Option

Delayed Exchanges- In delayed exchanges the investor takes direct ownership of the property, and sponsors are not in that chain of title as they are in the reverse exchange or improvement exchange. A lot of people just are unaware of other formats which are available to them and can extend their timelines dramatically.
Tax geniuses may be able to spout off Internal Revenue Code Sections, but most people never get beyond 401(k).

Still, “Section 1031” is gradually making its way into the daily conversation, bandied about by realtors, investors, title companies, and soccer moms. Some people even assert on making it into a verb, as in: “Let’s 1031 that property for another.”

To summarize, what is 1031? A 1031 exchange (also called a like-kind exchange or a Starker) is an exchange of one investment property for another real estate. Although most swaps are eligible for taxation, if the requirements of 1031 are met, investors will either have no tax or limited tax due at the time of the exchange.

In effect, Investors can change the form of their investment without (as the IRS sees it) cashing out or recognizing a capital gain. It enables the investment to continue growing with tax-deferred. There is no limit on the number of times or the frequency a 1031 exchange can be performed. Investors can revolve the gain from one piece of investment real estate to another to another and another. Although they may have a profit on each swap, investors defer taxes until they sell for cash many years later. Then also hopefully investors pay only one type of tax, and that at a long-term capital gain rate (currently 15% or 20%, varying on income – and 0% for some lower income taxpayers).

1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.

For consultation and assistance regarding 1031 exchange call 888-993-2835 or email us at info@1031xchange.com.

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”