A mechanism to defer your capital gains taxes through real estate
Capital gains is the profit (gain) from the sale of any asset. Businesses, investment real estate, vehicles, etc.
LONG TERM GAINS: for assets held longer than 12 months, your tax rate is 15% for under $445,000 in gains, or 20% if more.
SHORT TERM CAPITAL GAINS: For investments held shorter than 12 months, are treated as ordinary income and you are taxed at your individual or corporate income tax rate.
You purchased a real estate investment property and sold it for a profit 13 months after you purchase date.
Your purchase price is $350,000
You invest $100,000 to rehab the property.
You sell the property 13 months later for $650,000.
Total Cost of Investment:
$350,000 PP
$100,000 Rehab
+$50,000 CC, comm, etc
Total Cost = $500,000
$650,000
- $500,000
Capital Gains = $150,000
$150,000 x 15% =
$22,500 in IRS taxes
Internal Revenue Code Section 1031 (IRC Section 1031) is part of the tax code that allows you to postpone your capital gains tax payment if you reinvest the proceeds in a similar property as part of a qualifying like kind exchange.
Internal Revenue Code Section 1031 (IRC Section 1031) allows you to postpone your capital gains tax payment if you reinvest the proceeds in a similar property as part of a qualifying like kind exchange.
Postpone - delay the payment of the taxes you have to pay as a result of the capital gains generated from the sale.
Proceeds - net proceeds from the asset sale after all closing costs and expenses.
Reinvest - use proceeds from a sale, to purchase another more expensive asset
Qualifying - the new asset and the purchase structure for the reinvestment meets the strict standards of the IRC 1031
Like Kind - the reinvested asset must be of the same nature, character, or class.
Qualifying Like Kind - the new asset and the purchase structure for the reinvestment meets the strict standards of the IRC 1031 and the reinvested asset must be of the same nature, character, or class.
1. Both the sold property and reinvestment property must be held for use in a trade or business or for investment purposes.
Examples:
Qualified: sold a 1-4 unit residential investment property, then you purchase a 1-4 unit residential investment property.
FAIL: Sold a commercial warehouse and purchased a Semi tractor Trailer
FAIL: Sold a Commercial industrial facility purchased a 20-unit Residential Building
Qualified: Sold a 20 Unit Residential Building, Purchased a 60-unit mixed use building.
FAIL: Personal residences or Second homes/Vacation homes
Qualifying Like Kind - the new asset and the purchase structure for the reinvestment meets the strict standards of the IRC 1031 and the reinvested asset must be of the same nature, character, or class.
2. Personal Property CAN be exchanged for personal property, and Real Property for Real Property.
3. CANNOT exchange Personal for Real.
4. The following assets are excluded from Section 1031:
SIMPLEST 1031 EXCHANGE is a simultaneous swap of one property for another
1) You exchange your property and switch titles on the property with Seller
A Deferred 1031 Exchange is more complex yet a more flexible transaction.
Successful 1031 exchanges use a QUALIFIED EXCHANGE INTERMEDIARY.
QUALIFIED EXCHANGE INTERMEDIARY (QEI):
This is an independent 3rd party that facilitates the entire 1031 exchange, a sophisticated and complex escrow agent.
QEI must take full control of the entire transaction and take the Seller out of the transaction, and the Seller becomes a distant observer to the transaction.
TWO TIME LIMITS ON A DEFERRED EXCHANGE
There are 3 possible ways to identify Replacement Properties
Defer your taxes for years until the final sale of your assets
There are 3 possible ways to identify Replacement Properties
Sell: $500,000,
Purchase: $600,000,
Sell: $800,000,
Purchase: $1,000,000
Sell: $1,625,000
Capital gains tax on a once on the final $625,000 in Capital Gains