 Thanks
to IRC §1031, a properly structured exchange allows
an investor to sell a property, to reinvest the proceeds
in a new property and to defer all capital gain taxes.
IRC §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 an exchange offers,
consider the following example:
• An investor has a $200,000 capital gain and
incurs a tax liability of approximately $50,000 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. API is your resource to
obtain accurate and thorough information about the entire
exchange process
Contact
us for more info on CA Real Estate Investments - 1031
Exchange
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