Real Estate Investments
1031 and You. Building Wealth:
1031 Exchange refers to section 1031 of the Internal Revenue's Service Code that allows an investment property owner to move all of his equity from one property to another without it counting as a taxable event. It is referred to as a Tax Deferred Exchange when done properly.
Since you are still selling one property and buying another the process looks identical to a normal transaction, but it is done in accordance with the IRS rules.
Anyone planning to sell, and then buy another higher priced investment property should consider an exchange. As long as the properties in question are of "like kind" you could be eligible. Otherwise you are looking at the capital gain taxes, state and federal, that apply in your area.
By deferring those taxes you have the advantage of using the amount you would have paid in taxes as additional equity. This contributes to your investment from one property to the next. It is a government incentive to retain and build your investments in Real Estate. By using "tax dollars" as leverage you can build your estate more rapidly.
If you sell a property for $500,000 that you purchased for $100,000, your capital gains tax would have been 15% of the gain, or $60,000. With a 1031 you can exchange for a property worth $60,000 more than if you had paid those taxes. You can exchange up to higher value properties over time and have income from those properties for retirement, or any other plans you may have.
The basic rule is:
The Total purchase price of the replacement "like kind" property must be equal to or greater than the total net sales price of the relinquished real estate, property. All the equity received from the sale of the relinquished real estate property must be used to acquire the replacement property. To the extent you receive value from the exchange other than equity you have received "boot" which is taxable. There are many, many other reasons to do a 1031 exchange but they all defer taxes due on a sale or transfer of "like kind" properties.
Obviously, you need an Expert 1031 Realtor and your own tax advisors to help you. We can help you find out if an exchange is useful to you, and assist you along the way.