What is a 1031 Exchange and how could an investor benefit from this section of the law? According to 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.”
Below is an example of how 1031 Exchanges assist investors in creating wealth:
An investor has a $300,000 capital gain and incurs a tax liability of approximately $90,000 in combined taxes when the property is sold (federal & statement capital gains plus depreciation recapture). After paying the taxes due, $210,000 remains to purchase another property.
Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would be able to purchase a $840,000 replacement property.
If the same investor chose to complete a 1031 exchange, she would be able to reinvest the entire $300,000 of equity in the purchase of $1,200,000 in real estate, assuming the same down payment and loan-to-value ratios.
The example illustrates how investors avoid capital gain taxes in addition to growing their portfolio quickly. To avoid mistakes and realize the full potential of this law, it is critical to maintain a comprehensive and detailed knowledge of the code involved and the process. Why risk a mistake that disallows your exchange or causes you to leave money on the table?
For example, the code requires a “like-kind” replacement property. Too often this is interpreted by inexperienced investors to mean the “exact” type of property. Continental Title Group and experts like Kathleen Gibison, Esquire are your experts and guides through what some describe as a very technical process.
For a no-obligation consultation on your next sale-purchase in real estate, consult with Kathleen Gibison by calling 410-401-3500 or through email.