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Thanks to Section 1031 of the Tax Code, a properly structured like-kind exchange allows an investor to sell a property in certain situations, reinvest the proceeds in a different property, and defer capital gain taxes. The four basic steps in a 1031 exchange are:
1. The seller arranges for sale of property and includes exchange language in the contract.
2. At closing, proceeds from the sale go to a qualified intermediary for a 1031 exchange. 3. The seller identifies potential exchange properties within 45 days of closing. 4. The seller completes the 1031 exchange within 180 days of closing.
Here's how it works: Let's say you have a $200,000 capital gain and incur a tax liability of approximately $50,000 in combined taxes (depreciation recapture, federal and state capital gains taxes) when the property is sold. Only $150,000 remains to reinvest in another property.
Assuming a 25 percent down payment and a 75 percent loan-to-value ratio, you would only be able to purchase a $600,000 different property. However, with a 1031 exchange, you'd 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 exist.
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Contact our firm to learn how a 1031 tax-deferred exchange can help increase your return on real estate investments. |
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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