How to Do a 1031 Exchange
- Assume an investor has $400,000
in gain and also $400,000 in net proceeds after closing. Assuming an
investor with a $400,000 capital gain and incurs a tax liability of
approximately $140,000 in combined taxes (depreciation recapture, federal
capital gain tax, state capital gain tax, and net investment income tax)
when the property is sold. Only $260,000 in net equity remains to reinvest
in another property.
- Assuming a 25% down payment and
taking on new financing for the purchase with a 75% loan-to-value ratio,
the investor would only be able to purchase a $1,040,000
replacement property.
- If the same investor chose to
exchange, however, he or she would be able to reinvest the entire gross
equity of $400,000 in the purchase of $1,600,000 replacement property,
assuming the same down payment and loan-to-value ratios.
As the above example demonstrates,
tax-deferred exchanges allow investors to defer capital gain taxes as well as
facilitate 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 Section 1031 code. 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.
Asset Preservation,
Inc. (API) is one of the best 1031 exchange companies and your resource to obtain accurate and thorough
information about the entire exchange process.
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