Did You Know You Can Defer Real Estate Taxes Indefinitely?
Discover IRS 1031 Exchanges.
Owners of investment properties, including multi-unit residential and commercial buildings, can defer paying high capital gains taxes when they sell. We assist investors with “exchanging” properties and strategically improving their rate of return by minimizing taxes.
The benefits of IRC Section 1031 exchanges can be tremendous! Investors are often able to defer thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid §1031 exchange are met through strategic planning, capital gains tax may never be paid. This essentially results in a longterm, interest-free loan from the IRS.
Thanks to IRC Section 1031, a properly structured 1031 exchange allows an 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 property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
To understand the powerful protection a 1031 exchange offers, consider the following example:
- An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
- Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
- If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating 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 IRC.
For instance, an accurate understanding of the key term like-kind – often mistakenly thought to mean the same exact types of property – can reveal possibilities that might have been dismissed or overlooked.
Phoenix Homes works with Asset Preservation to help clients conduct 1031 exchanges.
Like-kind Property Explained
IRC Section 1031 does not limit “like-kind” property to certain types of real estate. The term refers to the nature or character of the property, rather than its grade or quality. Real property must be exchanged for like-kind real property. Real property is not considered like-kind to personal property.
An Exchanger’s primary residence and property held “primarily for resale” (dealer property) are excluded from tax deferral under IRC Section 1031.
The types of real estate which can be exchanged are extremely broad. Any real estate held for productive use in a trade or business or for investment – whether improved or unimproved – is considered “like-kind.” Improvements to real estate refer to the grade or quality, not the nature or character of the real property.
Like-kind Property Examples
- Unimproved for improved property
- Fee for leasehold with 30+ years to run
- Commercial building for vacant land
- Duplex for commercial property
- Single family rental for an apartment
- Industrial property for rental resort property
Defer Your Real Estate Taxes
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