Tax-Smart Real Estate Strategies

Section 1031 of the Internal Revenue Code is an effective strategy to defer capital gains tax that can rise from the sale of an investment real estate property. The 1031 exchange allows an owner of eligible property to complete a tax-free exchange by purchasing “like-kind” replacement property with the property sales proceeds. Such a transaction potentially allows deferral of up to 100% of the capital gains taxes otherwise due on the property sale. The IRS defines “like-kind” as any property owned for business or investment purposes.

This includes raw land, farmland, residential, rental and commercial properties. IRS Section 1031 does not apply to the exchange of stocks or bonds. This can be a powerful tool for building and preserving your wealth and as an estate planning strategy. It's key to work with a qualified financial professional who can guide you through the process and help you maximize the benefits of this strategy. 

It’s important to note that there are risks associated with this strategy like illiquidity and cost associated through fees.

• You are required to reinvest all proceeds earned from the sale of the property if you want to defer the entire gain.
• You are required to only invest in “like-kind” real estate assets.
• You must work with a qualified intermediary to facilitate the exchange for you.
• You must not take possession of funds at closing to have this qualify as a “like-kind” exchange.  
• You have 45 days to identify potential replacement properties.
• You have 180 days from the sale date of the original property to reinvest your funds.

Tax Deferral: A 1031 exchange is the ability to defer the payment of capital gains tax you would incur on the sale of an investment property. Instead of paying tax on the sale of your property, you can reinvest the proceeds in a new property and defer paying tax until you sell that property.

Gains created by the sale of property are typically taxable at both federal and state levels. The following taxes may be deferred through a 1031 exchange:

• Federal capital gains – Up to 20%
• State taxes – As high as 13%, in some states
• Depreciation recapture – 25% of utilized depreciation
• Net income tax – 3.8%

Deferred Depreciation Recapture: “Depreciation recapture” refers to the Internal Revenue Service's (IRS) policy that an individual cannot claim a depreciation deduction for an asset (thereby reducing their income tax) and then sell it for a profit without “repaying the IRS” through income tax on that profit. 

Increased Buying Power: By deferring the tax, you can potentially have more money to invest in a new property, which can increase your buying power as a real estate investor.

Portfolio Diversification: A 1031 exchange allows you to diversify your real estate portfolio with the possibility of shrinking your tax bill. For example, an investor can sell a single-family rental property and use the proceeds to purchase a multi-unit apartment building. In order for property to qualify for a like-kind exchange, it must be an investment property and not personal property, such as a personal residence.

Estate Planning: A 1031 exchange can be a powerful tool for estate planning, allowing investors to transfer assets to their heirs with a step-up in basis, potentially reducing or eliminating capital gains taxes to their heirs.

No Limitations on Number of Exchanges: There is no limit to the number of times an investor can use a 1031 exchange aimed at deferring tax on the sale of a property, as long as the exchange meets the rules and requirements set forth by Section 1031 from the Internal Revenue Service.

Disclosure: Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. 

This website is neither an offer to sell nor a solicitation of an offer to buy any security which can be made only by a prospectus, or offering memorandum, which has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers and registered investment advisors authorized to do so.

This article is neither an offer to sell nor a solicitation of an offer to buy any security which can be made only by a prospectus, or offering memorandum, which has been filed or registered with appropriate state and federal regulatory agencies, and sold only by broker dealers and registered investment advisors authorized to do so.

Additionally, we cannot offer any of our open offerings unless we have a pre-existing relationship with a customer. Once we have obtained sufficient information to perform an evaluation of our new customers’ financial circumstances and sophistication in determining his or her status as an accredited investor, we would be able to discuss future offerings once they become available. Per our BDPs- 1031 Exchanges must not be made based on a general advertisement, seminars, group mailings or widespread public solicitation.