Know More About… 1031 Exchanges
The 1031 Exchange name comes from Internal Revenue Code Section 1031. It enables you to defer capital gains tax and depreciation recapture by reinvesting the proceeds from the sale of investment property into replacement property, thus preserving significant wealth in your estate. Your 1031 exchange deferrals can be continued through as many exchanges as you wish. However, when you sell the property without reinvesting in a new property, there will be capital gains and depreciation recapture tax liability. Our Capital Gains Tax Calculator can help you get an idea of your liability.
In addition, a 1031 exchange lets you purchase a leveraged replacement property. This increases your basis by the amount of additional debt you assume and allows for additional depreciation pass-through. This can shelter as much as 50% to 60% of the rental-income cash flow from income taxes. On an after-tax basis, we believe the rate of return (ROR) for a 1031 exchange into securitized real estate is comparable to the ROR on investments that may carry more risk. With the possibility of additional return from appreciation of the property, the after-tax return on investment on an annualized basis can be even greater.
A tax-deferred 1031 exchange can be a powerful wealth-building tool. However, we highly recommend you consult a professional tax advisor to ensure that you meet every requirement of Internal Revenue Code Section 1031. Failure to meet requirements can result in immediate tax liabilities and associated penalties. In addition, you must follow – to the letter – the strict timeline and procedural requirements for a proper 1031 exchange.