Named for a specific section of the tax code,1031 exchanges are a valuable tool for real estate investors. Though the IRS does require that the exchanging investor meet some very specific requirements, 1031 exchanges provide some very important tax benefits. Here are the most notable.
• Defer paying any taxes – The equity in a property can be used to purchase a more expensive one without triggering a taxable event as long as no monies are removed by the buyer in the deal. If you acquire a more valuable property, you will not have to pay capital gains taxes, at that time, as a result of the transaction.
• Pay only long-term capital gains – This aspect of the exchange is most beneficial to those investors who want to “flip” properties. 1031 exchanges allow an investor to capture their profit and reinvest it in a larger property while still preserving the time aspect of the transaction for tax purposes. Any properties held for more than a year will be taxed at a much lower rate – typically 10%-20% once the last property is finally sold rather than exchanged.
• Minimize Taxes to your Heirs – This might be one of the biggest benefits for property owners who want to pass their investment properties to their heirs. When the real estate is transferred to the investor’s heirs, the heirs receive a step-up in cost basis equal to the fair market value at the time the investor passed away. The heirs do not inherit any depreciation recapture or capital gains tax liabilities on the real estate. Thus, it is possible that your heirs will never pay taxes, unless the property appreciates further and is sold rather than exchanged.
There are several types of 1031 exchanges. For more detailed information on how a 1031 exchange might work for you please contact All Property Title & Escrow. You can always find us online at AllPropertyTitle.com or call us directly at 954-753-5313.
All Property Title & Escrow, LLC does not provide tax advice. This material article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice. You should consult your own tax advisors before engaging in any transaction.