Real Estate Investment is a very lucrative option. Most of the real estate transactions are profitable and generate huge gains. However, there is a considerable tax load which an investor needs to bear once an investment property is sold. How about we tell you an option which will allow you to sell your property and will not demand tax payment.
Surprised? Can’t believe?
Well, we do know how this sounds yet it’s true!
1031 Exchange – An Excellent Way to Defer Taxes Indefinitely
A 1031 tax deferred exchange allows investors to reinvest the profits from the trade of investment property in one or more replacement properties without inviting immediate federal (and most state) capital gains taxes on the appreciated value. When the sale and purchase fulfill the 1031 exchange standards, taxes are delayed until the newly procured property is sold. This deferral strategy can be duplicated through any number of exchanges until the tax liability crosses into the individual’s estate upon death.
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.
Understanding 1031 Exchange
1031 Exchange enables investors to strategically manage their real estate investments while maintaining equity, diversifying portfolios, and gaining tax advantages. To assist investors with completing their 1031 exchanges on time, we maintain a database of investment properties suitable for 1031 exchanges. These investment properties range from multi-family properties to TIC (tenants in common) properties to net-leased investments.
Access to a nationwide database provides potential advantages to real estate investors. For example, let’s say an investor wants to diversify geographically and get into a growing real estate market in the Phoenix, Arizona area. The problem for many investors with this strategy would only be finding the right property to invest in there within the 1031 deadlines.
Allow Experts to Manage a Successful 1031 Exchange for You
1031 Tax deferred 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 888-395-0046 or email us at firstname.lastname@example.org.