1031 exchanges can help with capital gains taxes
If you’re a real estate investor, ready to retire, ready to give up tedious tenant duties, ready to sell your property and move on to something new, this means that the payment of capital gains taxes is looming in your future. Unlike appreciated stock, you can’t sell shares over a long period of time. The entire gain amount must be claimed in the year that you sell your property. The only way to avoid paying your capital gains tax is with a 1031 exchange!
Here at Diversified Investment Strategies, we specialize in helping real estate investors take advantage of the Internal Revenue Code Section 1031. Our team of tax advisors, attorneys, real estate brokers and financial consultants was formed specifically for this purpose. Contact us at any time to determine if a 1031 exchange may work for you!
For a tax-free 1031 exchange transaction, these are a few of the conditions that must be met:
- The property you sell must be exchanged for “like kind” property.
- The property must be used for business or investment and traded for the same use.
- New property must be identified within 45 days of the first transfer.
- The transfer must take place within 180 days.
Our team at DIS can explain more about these requirements in detail. Because the rules for a 1031 exchange are complex and specific, it’s imperative that you work with a team of experienced professionals who can guide you through the process!
Here’s an example of a tax-free 1031 exchange: You purchased a lot of land for $50,000 four years ago, and it’s now worth $150,000. To avoid paying taxes on the $100,000 gain, you find an investor selling a rental property for $150,000. You agree to trade properties in a 1031 exchange and avoid paying the capital gains tax.
Finding a property with the same trade value is ideal, but not always possible. One party may need to throw in some extra cash to make the deal fair. This amount is known as “boot” and is taxable. This may result in a partially tax-free exchange.
Here’s a great example of a partially tax-free 1031 exchange shared in an Investopedia article: You own a building with a fair market value of $200,000, with an adjusted basis of $100,000, with no mortgage remaining. You exchange it for a rental property with a fair market value of $150,000, with no mortgage remaining, plus $50,000 in cash, known as boot. That means you will have an actual gain of $50,000 on the exchange.
1031 exchanges can seem complicated, but not when you have a team of professionals to answer your questions, determine your options and help guide you through the process. Contact our team at Diversified Investment Strategies! We would love to help you out.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Because investors’ situations and objectives vary, this information is not intended to indicate suitability for any particular investor. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified Investment Strategies is independent of CIS.
Bryan Hakola
Diversified Investment Strategies
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