1031 Tax Deferred Exchanges

Property owners looking for tax relief from capital gains should consult with 1 Stop Realty to evaluate ways to defer paying capital gain tax when selling property. We specialize in developing exchange strategies for various forms of tax-deferred exchanges. 1 Stop Realty has the expertise and experience required in today's challenging business and tax environment.

Benefits of Exchanging
Prior to 1979, trading properties was at best complicated. Completing a tax deferred exchange meant properties had to be "swapped" simultaneously. Unfortunately, this made exchanging cumbersome and risky, if not impossible.

In 1979 a ruling by the U.S. Court of Appeals enabled the non-simultaneous or "delayed" exchange to qualify for tax deferral. This gave investors the time necessary to find desirable replacement property by using an Intermediary.

Treasury Regulations effective June 10, 1991 validated the delayed exchange and simplified the exchange process. By providing specific guidelines, these Regulations were welcomed by real estate investors who were previously uncertain of the viability of 1031 transactions.

Many investors have held property for years because a sale translated into paying taxes of up to 40% of their capital gain. Typically, as an investor's needs change over the years, the type of investment property they want changes. Relocation, estate building, retirement, desire to increase cash flow, or wanting to reduce management responsibilities, all affect the type of property investors want to own. Under IRC Section 1031, investors now have the alternative of moving their investments (and equities) into more desirable or profitable properties.

"The true power of exchanging is the ability to meet investment objectives without losing equity to taxation."

Exchanging Real Property
Often investors do not realize taxation on a personal residence is far different than taxation on an income or investment property. Under Internal Revenue Code §121, single homeowners are allowed to exclude up to $250,000 of capital gains ($500,000 for married couples) upon the sale of a principle residence, provided they have owned and occupied it two of the previous five years.

If an investor sells property they pay tax. Taxes are paid on capital gain, not equity or profit. However, property that qualifies for preferential treatment under Internal Revenue Code §1031 is treated quite differently.

"No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes is exchanged solely for property of a "like-kind."

The benefits of exchanging include using leverage to maximize your investment dollars to property diversification to allow you the widest range of investment freedom. 1031 Tax Deferral can range anywhere from a simple swap of two properties to a complex, multi-leg, multi-property transaction involving a delayed, reverse or construction exchange. The investment strategy and the nature of the transaction will decide which exchange best suits your needs.

Imagine selling rental property or land, acquiring new real estate of any type and not paying one dime in capital gain taxes!

Leverage
"Every dollar saved will allow an investor to purchase twice as much real estate..."

This is possible through leverage. Leverage is a method of acquiring real estate worth several times the value of the initial investment. Tax deferment increases leverage. The following example shows the value of leverage by illustrating the benefit of exchanging versus selling.

$400,000 x 20% capital gain tax = $80,000

If an investor sold property with a gain of $400,000, he/she would pay taxes of $80,000 and have only $320,000 left to reinvest. On the other hand, the investor who exchanges pays no capital gains tax, leaving the entire $400,000 to reinvest.

Sale

Proceeds                 $400,000                         Proceeds                $400,000

Tax Owed               -$80,000                         Tax Owed                     $-0-

Cash to Reinvest     $320,000                         Cash to Reinvest     $400,000

If each investor purchases a building with a 20% down payment, using leverage, each could buy a property worth:

Sale Value $1,600,000 Exchange Value $2,000,000

In a single transaction, the investor who exchanged has $400,000 more property than the investor who sold property.

Please contact us for a no-obligation consultation on how 1031 Tax-deferred Property Exchanges can benefit you and your estate. An additional resource is www.starker.com.