Tax Deferral: 1031 Exchange

The IRS Website provides a helpful overview of the Like Kind Exchange. This link: 1031 Exchange PDF provides FAQs with the following topics:

• Who qualifies for the 1031 exchange?
• What are the different structures of a Section 1031 Exchange?
• What property qualifies for a Like-Kind Exchange?
• What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?
• Are there restrictions for deferred and reverse exchanges?
• How do you compute the basis in the new property?
• How do you report Section 1031 Like-Kind Exchanges to the IRS?

Investing Land Proceeds in Real Estate Assets

Almost all real estate assets can be exchanged for other real estate assets. The exception is property used for personal use (vs. a business use). The examples are generally primary residences and vacation homes, which are personal use in nature.

Selling a $3,000,000 property?

You could have gains of $1,000,000 or more. With the capital gains tax of 20%, you would pay $200,000 in taxes. This is the minimum, yet you have the possibility of depreciation recapture, the affordable care act surtax, or a state capital gains tax.  

Save $500,000 for every $1,000,000 in Gains

If we separate items and review the 20% capital gains tax, a 1031-Exchange would save the tax payer $500K for every $1 Million in gains.



Our example uses the following:

• Investing the $1 Million of gains in a private real estate asset
• A 12% IRR (internal rate of return) over 10 years
• (a conservative estimate when looking at averages over the past 50 years)
• In 10 years, the $1 Million investment will result in ~$2.7 Million

Without the 1031 Exchange

• The investor is taxed and now can only invest $800,000
• In 10 years, the same 12% IRR investment would net only ~$2.2 Million
• A $500,000 difference for only $1 Million in gains