The 1031 Tax Deferred Exchange is perhaps the most important tool available to investment property owners to preserve capitol and build wealth. The 1031 Exchange provision of the US Internal Revenue Code has been employed by seasoned investors since 1921 to create over time, very large investment portfolios from a single property. This is done by periodically selling income property, then reinvesting the built-up equity that would otherwise be lost to capital gains taxes. By continuing to leverage that built up equity, it is possible an investment of $500,000 could be worth several million dollars over 20 to 30 years.
1031 Exchange Defined
Thanks to Internal Revenue Code Section 1031, a properly structured 1031 Exchange allows an investor to sell a property and reinvest the proceeds in a new property and to defer all capital gain taxes. The government created the 1031 Exchange to incentivize owners to sell older properties that will then be renovated or redeveloped by investors. This creates jobs, prevents urban blight and helps cities maintain a strong property tax base. 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 (replacement) 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 $500,000 capital gain after a sale of a property for $1 million. He incurs a tax liability of approximately $150,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $350,000 remains to reinvest in another property.
Assuming a 75% loan, the seller would only be able to purchase a $1.4 million replacement property. If the same investor chose to exchange, however, he or she would be able to reinvest the entire $500,000 equity in the purchase of $2 million in real estate, assuming the same down payment and loan-to-value ratios. Now the owner is enjoying appreciation on a property worth 2 million, double the value of the property he sold.
If you would like sell and acquire real estate in a 1031 Exchange, you must to have an experienced commercial real estate broker with comprehensive knowledge of the 1031 Exchange process and a demonstrable track record of success. I offer both. With tight timelines and strict rules to follow, you need a commercial real estate broker who can provide you with the best investment property options and assure flawless execution. My knowledge and experience will help you smoothly execute your 1031 exchange. For a free professional opinion of value and help finding and evaluating commercial real estate replacement property in Hampton Roads and elsewhere, contact me today.