How The Rollins Group LA can help with your 1031 Exchange
Our goal is to provide you with all relevant information we and our consultants can provide to enhance the process for you. With our resources and experience we can optimize the transaction for you!
With numerous transaction by ourselves and our consultants, the hurdles can be minimized and we can focus more on your needs in the sale and repositioning your portfolio to more suit your goals for the future!
In this section, you’ll find a summary of the key points of the 1031 exchange, rules, concepts, and definitions you should know if you’re thinking of getting started with a section 1031 transaction.
1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
Under section 1031, any proceeds received from the sale of a property remain taxable. For that reason, proceeds from the sale must be transferred to a qualified intermediary, rather than the seller of the property, and the qualified intermediary transfers them to the seller of the replacement property or properties. A qualified intermediary is a person or company that agrees to facilitate the 1031 exchange by holding the funds involved in the transaction until they can be transferred to the seller of the replacement property. The qualified intermediary can have no other formal relationship with the parties exchanging property.
As an investor, there are a number of reasons why you may consider utilizing a 1031 exchange. Some of those reasons are listed below.
The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is that you gain a tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.
It’s important to keep in mind, though, that a 1031 exchange may require a comparatively high minimum investment and holding time. This makes these transactions more ideal for individuals with a higher net worth. And, due to their complexity, 1031 exchange transactions should be handled by professionals.
Depreciation is an essential concept for understanding the true benefits of a 1031 exchange.
Depreciation is the percentage of the cost of an investment property that is written off every year, recognizing the effects of wear and tear. When a property is sold, capital gains taxes are calculated based on the property’s net-adjusted basis, which reflects the property’s original purchase price, plus capital improvements minus depreciation.
If a property sells for more than its depreciated value, you may have to recapture the depreciation. That means the amount of depreciation will be included in your taxable income from the sale of the property.
Since the size of the depreciation recaptured increases with time, you may be motivated to engage in a 1031 exchange to avoid the large increase in taxable income that depreciation recapture would cause later on. Depreciation recapture will be a factor to account for when calculating the value of any 1031 exchange transaction - it is only a matter of degree.