1031 Exchanges - The road to building long term wealth is paved in the tax code
Thursday, August 16, 2018
Hello fellow real estate investors,
Some of you are well versed with the term “1031 exchange” and others may have very little knowledge on the process. In this article, I will begin by defining what 1031 exchange is. Then explain some of the basic requirements and procedures for using a 1031 exchange. Finally, I will walk you through a hypothetical example to highlight the major tax advantages of utilizing a 1031 exchange to build and maintain wealth in real estate. If you ever have more in-depth questions about the process, please reach out to our team and we can provide more information and put you in touch with the right experts. *I am personally not a cpa, all the numbers included are simplified and estimated*
According to Inestopedia.com: “Broadly stated, a 1031 exchange (also called a like-kind exchange or a Starker) is a swap of one investment property for another. Although most swaps are taxable as sales, if yours meets the requirements of 1031, you'll either have no tax or limited tax due at the time of the exchange. In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax deferred. There's no limit on how many times or how frequently you can do a 1031. You can roll over the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you sell for cash many years later. Then you'll hopefully pay only one tax, and that at a long-term capital gain rate (currently 15% or 20%, depending on income – and 0% for some lower income taxpayers).”
In order to properly and legally execute a 1031 exchange, there is a set of rules that needs to be followed...