A Section 1031 exchange is a real estate transaction in which a taxpayer is allowed to sell one property and buy another without a tax consequence. This is done through either a Simultaneous or Delayed 1031 exchange. The transaction is authorized by section 1031 of the IRS code. It is one of the best strategies for the deferral of capital gains tax that would ordinarily arise from the sale of real estate. It is also one of the best ways to gain wealth quickly by rolling over profits and deferring taxes, enabling you to invest more of your capital.
A successful exchange results in the taxpayer being able to utilize 100% of the proceeds from the sale of a property to purchase a new property, thereby deferring the capital gains taxes.
Real Estate owners can accomplish a variety of investment objectives with 1031 exchanges including diversification, improved cashflow, greater capital appreciation, greater leverage, and property diversification.
A 1031 Exchange is a way to defer capital gains taxes on the sale appreciated investment real estate. Federal Capital Gains taxes are currently 15%, state tax is 0-10%, and depreciation recapture 25%. All of these taxes can significantly impact the amount of capital you have to invest.
For Example:
If you have a property that you purchased for $1,000,000 and you sell the property for $2,000,000, you have a net gain of $1,000,000. If the taxes on the sale total up to 35%, you would only have $650,000 to invest. using 70% leverage, you could purchase a property worth $2.15m.
However, if you utilize a 1031 exchange, you would have $1,000,000 to invest, using the same leverage, you could purchase a property worth $3.3m. That is a big difference!
1031 exchanges are a great way to build wealth and grow your net worth on tax deferred money. As you can see from the example above, there is a significant difference between paying the taxes on a sale, and exchanging into another property. Take the above scenarios and you can see the large difference if you were to do the same thing again. After exchanging a second time, you would be millions of dollars apart. A 1031 exchange is a way that the government has allowed investors and real estate owners to substantially increase wealth while using tax deferred money. Please contact us to see how we can assist you with your next exchange.