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1031 Exchanges

Posted on May 21, 2008

Today I attended a seminar on 1031 exchanges. I’ve been selling for over 27 years, and I have done my fair share of exchanges, but I went to the class anyway just to see if I could pick up any *new info to share with my customers. The class was given by a gentleman named Marshall Beene who is an exchange account coordinator with U.S. National 1031 Exchange.

An investor in real estate understands how important it is to preserve wealth and assets. The investor is fortunate to have this tax code which gives them the ability to defer taxes on their gain and rollover equity of “like kind” properties. Thus, the investor continues to build wealth through real estate investments and maintains the hard earned equity.

First of all, let me define what an IRC 1031 Tax deferred Exchange is: A 1031 Exchange is a transaction which specifies if an asset (a form of real estate such as land or a commercial building) is sold and the proceeds of the sale are then reinvested in an asset of a similar kind, therefore no capital gain or loss is recognized, allowing the deferment of capital gains taxes that would otherwise been due on the first sale. The actual law is Title 26, section 1031 of the Internal Revenue Code.

All clients should refer to their CPA for tax or legal advice, but if you have basic questions about what an IRC 1031 Tax Deferred Exchange is we welcome your call. Many of these questions can also be answered by logging onto http://www.usnational1031.com/

Okay, now for the *new info…I thought this was interesting…If you, an investor, purchased a property for $200,000. and the current market value is $500,000…BUT, if you have taken equity out of the property over your time of ownership, you will still owe capital gains on the estimated $300,000 difference–known as gain (less added improvements, less depreciation, less selling expenses,etc…I’m just trying to keep the example simple) even if your current mortgage debt is $400,000 or more…The tax due on the sale is based on the estimated gain on the sale regardless of whether you have refinanced or gotten equity out of the property. In this instance, it would be better to consider a 1031 exchange and “roll” the sale into another like kind property of equal or greater value and continue to build wealth rather than get “stuck” owing taxes on a property you now have little or no equity in. Again, I always recommend you call your CPA, but I thought that in today’s market there might be a few investors out there in similar situations that might find this info helpful.

If you own an investment property here in Naples Florida and want more info about the 1031 exchange and how it could benefit you, please call The Harris-Peppe Team today. 239.370.0574

Thank you, and make it a great day,

The Naples Real Estate Blogger