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.