For the uninitiated, an Internal Revenue Code Section 1031 Tax Deferred Exchange (A.K.A. 1031 Exchange) is a provision in the IRS tax code that allows for the swap, or “exchange” of one investment real estate asset for another, without the recognition of a capital gain or depreciation recapture. This is of course a gross oversimplification, but is helpful in conveying the basic concept of this rule.
There are several benefits to a 1031 Exchange. First is the deferral of long-term capital gains on highly appreciated assets. On large transactions and for individuals in the highest tax bracket, this is typically 23.8% (20% long term capital gain plus the Net Investment Income Tax of 3.8%, courtesy of the Affordable Care Act / Obamacare) on the gain. The exchange also allows for the deferral of depreciation recapture in addition to the gain. Secondly, many investors who have little to no remaining basis in the relinquished property choose to use leverage in addition to the net proceeds received from the sale, in order to buy either larger assets or multiple properties, thereby increasing their basis from which they can depreciate against in the future, creating additional tax savings on the income from the replacement properties.
Whether you are in the initial stages of contemplating the sale of a property or have already sold a property and are seeking help with the acquisition of a replacement property, the principals of Arete Real Estate Advisors LLC have extensive experience in successfully completing 1031 Exchanges and are able to assist our clients at any stage of the process. We will work with your tax and estate planning advisors and Qualified Intermediary (QI) to develop strategies to minimize your tax burden, reduce risk, and improve the odds of a successful exchange. Please contact us for additional details.
NOTE - Arete Real Estate Advisors LLC and its principals are not CPA’s or Attorney’s and cannot offer tax or legal advice. Please consult with your tax and legal advisors as to whether a 1031 Exchange may be suitable or appropriate given your particular circumstances.