Holding on to Wealth with 1031 Exchanges
A 1031 exchange, named for its section of the Internal Reve nue Code, is a common method to postpone capital gains tax when you are reinvesting the proceeds into another similar, or “like-kind”, property. Many people are surprised to find how broadly the “like-kind” criterion is interpreted by the IRS. Generally, any real estate in the U.S. held for business or investment purposes will be considered “like-kind” with any other, regardless of type. There are no limits to the num ber of times you can do a 1031 exchange.
There are two important criteria that make this exchange different from a sale and a purchase.
1) The seller does not take possession of cash from the sale. Most people use an intermediary to hold the cash between transactions.
2) All parts of the exchange close within 180 days.
Example: You have been operating your business in a office building you bought for $300K and have an opportunity to sell it for $1M. Your capital gain would be $700K. (If you had been deducting depreciation expense over the years, your cost basis would be lower and your gain higher.) If you sell the property for cash, you will pay $105,000 in taxes (assuming a 15% tax on the $700K gain) and have $895,000 to reinvest. If you use a 1031 exchange, you can reinvest the full $1M into other real estate, even a warehouse, vacant land, or one or more residential rental properties.
The 1031 exchange is a valuable tool in preserving the wealth of your business and investment property. Like any law, the tax code could change. There have been reports that one of President-elect Joe Biden’s policy proposals would either curtail or eliminate some 1031 exchanges.
Choyce Peterson, Inc.
Choyce Peterson, Inc.
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