Whenever Washington politicians act like they’re serious about deficit reduction or tax reform, certain revenue-raising proposals find their way onto lists of proposed policy changes.
One of their recent favorites is the idea of limiting or removing altogether the ability of commercial property owners to defer capital gains taxes on real estate transactions, a practice known as 1031 exchanges, thanks to the provision’s home in section 1031 of the IRS tax code. You’ll also hear these referred to as “like-kind exchanges.”
Simply put, and with the understanding that there are many caveats and compliance details, a 1031 exchange is a process that under certain limited circumstances allows a commercial property owner to defer paying capital gains taxes at the time they sell a CRE investment property.
A young RN and former schoolteacher decided to leave the big city and stake their claim in Chico, CA. This couple’s dream was to create a best-in-class senior/assisted-living facility to provide a tremendous quality-of-life for those in their final years. Bootstrapping was the only way forward for the Kupermans but they had a vision and were undeterred. Over 2 decades later, the business and real estate holdings had grown from a 6-bed (in 1 small rental home) facility to a large operation spanning 5 commercial assisted-living facilities. When the Kupermans decided to slow down & begin enjoying the fruits of their labors, their entire operation was put on the market for sale. The blue skies of 2019 soon turned dark & ominous in 2020 when the impact of covid-19 threatened what they had built. Fortunately, patience and persistence won; the clouds parted, and the assisted-living facilities were sold.
Ben Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” Well, fast forward to the present day, and one part of his quote remains to be true: death. But for individuals who invest in real estate, there is a way to defer capital gains taxes after all. That way is through a 1031 exchange. And whether you’re a new or experienced investor, you can greatly benefit from this real estate transaction. Today we’ll be discussing the top five reasons to pursue a 1031 exchange according to two 1031 exchange brokers.
1031 exchanges can be complex. But when carried out correctly, they offer many benefits for investors. Obviously, the biggest benefit of carrying out a 1031 exchange (as opposed to simply selling a property and buying another one) is the tax payment deferral. But the benefits don’t stop there. 1031 exchanges can help you diversify assets, consolidate multiple properties into one for estate planning purposes, and reset property depreciation. Because of the complex nature of this type of real estate transaction, it’s best to seek the support of a 1031 exchange expert.
Navigating the tax code is a lengthy and tedious process - especially if you are unfamiliar with the code itself and how to identify potential benefits. One key benefit that those with investment properties can leverage is that of the 1031 exchange transaction. A 1031 exchange is a transaction that allows you to sell a rental or investment property and defer all capital gains taxes that would come on a sale by essentially reinvesting your would-be profits into another investment property. A 1031 exchange is not the ideal solution for every real estate transaction, but when it is, this particular type of transaction can save investors hundreds of thousands (or even millions) of dollars in taxes.
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