“America has always had two tax systems: one for the informed and one for the uninformed. Both systems are legal” Former Justice Learned Hand.
Without the use of a 1031 tax free exchange, gain on the sale of a real property will be subject to the following taxes:
- A 25% federal tax on the portion of capital gain attributable to depreciation taken
- A 15% federal tax on the remainder of the capital gain
- State income tax
- Possible exposure to the Alternative Minimum Tax.
Depending on your state income tax rate, it’s not unusual for a capital gain to be subject to a total tax of 25-30%. In about all cases the effective rate is high enough for the exchanger to seriously consider saving taxes through 1031. The alternative is to pay the tax and be left with a smaller amount to invest in something other than real estate. Put another way, it usually makes economic sense to convert the taxes that are saved in a 1031 exchange into an income-generating real estate asset.
The taxes saved can be thought of as an interest free loan which can be used to generate current income and profit for you. With proper planning this “loan” may never have to be repaid.
The TAX BENEFITS associated with a 1031 exchange are substantial and include the following:
1. Deferral of all capital gains taxes for an indefinite period. In fact, if you hold the replacement property until death, then your surviving spouse or heirs will receive the property on a stepped up basis. The property could then be sold without any taxable gain.
2. A renewal or increase in depreciation deductions which results in tax free cash flow.
General Rule of Thumb:
To avoid paying any capital gains taxes, you should attempt to:
a) purchase property which is equal to or greater in net sales price (value)
b) reinvest all of the equity in the replacement property.
c) have equal or greater debt on the replacement property.
Note: a reduction in debt can be offset with additional cash invested; but increasing debt cannot offset a reduction in equity (ie. taking out cash from net sales proceeds)
1031 EXCHANGE EXPLAINED
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PROPERTY THAT QUALIFIES
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REPLACEMENT PROPERTY CRITERIA
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TAX SAVINGS AND ECONOMIC BENEFITS
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ADVANTAGES OF EXCHANGE
SECURITIES OFFERED THROUGH Concorde Investment Services, LLC, a member of FINRA/SIPC. 1031TaxSavings.com and its parent company Capstone Financial Services, LLC are independent and not affiliates of Concorde Investment Services, LLC.
OSJ: 1120 E. Long Lake Road, Ste. 250, Troy, MI 48085 - 248.824.6710
This site has been prepared for informational purposes only and does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. Such offers may only be made by written prospectus and only in a jurisdiction where the security is duly registered or exempt from registration therein. The information contained herein was current as of publication but is subject to change without notice. The information contained herein was obtained from sources believed to be reliable; however, we make no guarantee regarding its accuracy or completeness. Furthermore, due consideration should be given to risks associated with real estate ownership such as market, interest rate, and default risks.
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