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1031 Exchanges

1031 Exchanges

Foundation Title can arrange for buyers or sellers of investment real estate to coordinate their closings with a Qualified Intermediary who is experienced in 1031 Exchanges.

Thanks to IRC §1031, a properly structured exchange allows an investor to sell an investment property, to reinvest the proceeds in a new investment property and to defer all capital gain and recapture taxes. IRC §1031 (a)(1) states:

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

To understand the powerful protection an exchange offers, consider the following example:

An investor sells a $500,000 investment property, has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $430,000 remains to reinvest in another property.

Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $1,720,000 new investment property.

If the same investor chose to exchange, however, he or she would be able to reinvest the entire $500,000 in the purchase of $2,000,000 in investment real estate, assuming the same down payment and loan-to-value ratios.

As the above example demonstrates, exchanges protect investors from depreciation, recapture, and capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term “like-kind” – often mistakenly thought to mean the same exact types of property – can reveal possibilities that might have been dismissed or overlooked.

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