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Understanding 1031 Exchanges Let’s dive in and look at the 1031 Exchange. Let’s look at what the IRC 1031 Exchange can do for you. Can you benefit from the IRC 1031 Exchange? Here is a breakdown, you can decide for yourself. Let’s take a look. What is a 1031 exchange? The 1031 Exchange refers to section 1031 of the Internal Revenue Code. Properly structured 1031 exchanges allow deferment of capital gains after the sale of one property, when profits are reinvested in a second property within the guidelines. 1031 Exchanges are very powerful, let’s look at an example.
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Only $65,000 would be left after capital gains of 100 thousand dollars assuming about 35 K in combined taxes.
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Only $260,000 would be left to invest in property B assuming 25% down and a loan to value of industry standard 75%. If that seller chooses to exchange, he or she would then be permitted to reinvest the entire $100,000, assuming similar loan-to-value ratios, that would allow the investor to purchase a new property of up to $400,000. Protection from capital gains is the hallmark of 1031 Exchanges. It would be extremely useful if you had a firm grip of all the terminology used in the 1031 exchange. Use capital gains calculators, which can be found online, and find out what a 1031 exchange can provide you. Do your homework prior to attempting to do a 1031 exchange. There are three steps in calculating your capital gains, use a CPA or property tax expert in this area, this part can be tricky, and not where you want to make a mistake. Time limits are in play when it comes to 1031 exchanges, know your timetable or it could cost you. The purchase of the second property has a time limit as you would expect, 180 days or up until you file your taxes, whichever occurs first. A good number of investors choose to do exchanges immediately following tax season, allowing them the maximum time to acquire the second investment property. Financial advisors, tax accountants and real estate professionals should be able to assist you with your 1031 exchange. Use someone with a proven track record. Good luck with your 1031 Exchange. If you plan to sell a property and use that money to reinvest in another investment property, you need to find out if a 1031 exchange is available for your needs. Make sure to take your time and get it right, there is a fair amount of red tape associated with 1031 exchanges, take it slow and get it right the first time. 1031 exchange programs allow savvy investors the ability to maximize their investment potential.