Savvy investors often take advantage of a tax strategy referred to as a '1031 Exchange'. It is referred to by this name because it comes from Section 1031 of the Internal Revenue Code and it allows for the deferral of gain on the sale and purchase of real estate held for use in a trade, business or investment. There are numerous benefits to this strategy that are both short term and long term.
- Immediate tax avoidance
- Time value of deferred gains
- More money available for buying replacement real estate
- Tax forgiven upon death (heirs receive stepped up basis)
- Relocation of an investment property or business
- Defers appreciation gain as well as depreciation recapture
- Possible conversion to personal residence or second home
There is also a strategy called a 'Reverse Exchange'.This is when a buyer identifies the property he wants to purchase and then sells an investment property that is already owned as the exchange.
These strategies have become even more important with the new tax guidelines outlined in the American Taxpayer Relief Act of 2012. This Act which took effect January 1, 2013, raises the top rate for capital gains and dividends to 20% (from the previous 15%). There are income thresholds that must be calculated to determine what the percentage will ultimately be for each taxpayer that has capital gains. Therefore, it is critical for real estate investors to explore this option when buying and selling properties used to generate income. To keep current and knowledable, KBB often has forums that feature talks by a Certified Public Accountant and Qualified Intermediaries for 1031 Exchanges. We can help guide investors to make the most advantageous decisions for preserving wealth.
If you have questions about whether a1031 exchange is right for your real estate transaction, then please contact us.