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Thanks to Internal Revenue Service Code Section, 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."
A §1031 Tax-Deferred Exchange is one of the
last tax shelters allowed by the Internal Revenue Service. It is a
transaction in which a taxpayer exchanges investment property for
like-kind property and defers the payment of capital gain taxes. There
are important rules which must be followed to effectuate a valid
exchange. We have included information about these rules and procedures
on this website.
To understand the powerful
protection an exchange offers, consider the following example:
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An
investor has a $200,000 capital gain and incurs a tax liability of
approximately $70,000 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.
Click
for REQUIREMENTS
FOR FULL TAX DEFERRAL
IRN Realty does not provide tax or legal advice. Investors should
always seek the advice of their tax and/or legal advisors regarding
their specific situation.
For information about any aspect of real estate
or any problem you may have with your property...
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TOM ANDROS
Direct:
909 985-4898
| 800 403-1139
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