Defer Capital Gains Tax on Real Estate Sales

with the 1031 Exchange

It can be difficult to make good money from selling real estate when you have to pay taxes on net profits. However, there is an absolutely legal technique that most savvy investors use to delay paying capital gains tax: The 1031 Exchange.

The 1031 Exchange in a NutshellUnder Section 1031 of the Internal Revenue Code, a property seller can put off paying capital gains tax on a real estate sale if they reinvest the equity into another investment property of “like-kind.” In other words, a seller must “roll over” the profits made from the sale of one property into the purchase of another property.

Basically, an investor can keep swapping like-kind properties throughout their lifetime to avoid paying capital gains taxes. Upon death, the investment properties can be passed on to the rightful heirs, tax-free.

A 1031 Exchange is a sensible strategy for conserving your equity and minimizing your tax liabilities. It is especially helpful when:

You have a real estate investment that is no longer giving you income (e.g. raw land, unused warehouse, etc.). You could swap this for a more profitable property such as a duplex or a condo rental.

Your investment property is in an area that has become economically stagnant. You can sell this asset and exchange it for a property situated in a prime location.

Your rental property is becoming difficult to manage or you can’t keep up with the maintenance costs. A 1031 exchange is a smart way to dispose of it and trade it for another rental property that is easier to manage.

What Properties Qualify for a 1031 Exchange?Your personal residence will not qualify for a 1031 treatment. Only real estate used for trade, business or investment purposes (such as condo rentals, apartments and office buildings) within the United States can be sold and bought in a 1031 exchange.

Section 1031 of the Internal Revenue Code states that only properties of “like-kind” may be swapped. Contrary to what the term implies, this does not mean that your replacement choices are only limited to property that is similar to your present property. You don’t have to trade an apartment building for another apartment building. You are absolutely free to swap with a different type of real estate. For instance, you can sell a farm and use the equity to buy a gas station—or trade an office building for a multiplex. It doesn’t matter what type of real estate you exchange your property for as long as you are buying or selling it for business, trade or investment purposes.

Exchange RequirementsTo successfully avoid paying any capital gains taxes in an exchange, the investor must meet the following conditions:

The replacement property must be equal to or greater than the value (sale price) and existing debt of the relinquished property.

Both the relinquished and replacement properties must be used for trade, investment or business purposes only. The 1031 exchange cannot be used for:

Stocks, bonds or notes Stock in trade or other property held for resale Interests in a partnership Certificates of trusts or beneficial interests Other securities or evidences of indebtedness or interest

The entire amount of the net proceeds from the sale of the relinquished property should go into the acquisition of the replacement property.

Why Exchange Instead of Sell?Aside from the deferral of taxes, the proper use of a 1031 exchange gives investors a host of other wealth-building benefits.

Increase your purchasing power. With a 1031 exchange, the government practically hands you an interest-free loan on taxes until such time that you decide to sell the property for cash. You can use your tax savings to invest in bigger and better real estate property that will help you accumulate more wealth over time.

Improve your return on investment (ROI). A 1031 exchange is a cost-effective way to get rid of an under performing asset and exchange it for a more lucrative one. For instance, you could trade off an unused warehouse for a more profitable rental duplex.

Consolidate or diversify your investment portfolio. The 1031 exchange allows you to diversify your investments by purchasing real estate located in different geographic areas (within the country) and also by acquiring diverse asset types (e.g. industrial, residential, office and retail, etc.). You can also consolidate by selling multiple properties and trading them in for one larger replacement property.

Replace management-intensive investments. Particularly in the case of retirement, a property owner may wish to reduce day-to-day management responsibilities. A practical solution would be to exchange your current property for a triple net lease property or tenant-in-common interests.

Estate planning. When an investor decides to maintain 1031 exchanges throughout his or her lifetime, they preserve 100% of the equity and appreciation in their properties. They can pass on these benefits to their heirs. Upon their death, the deferred taxes on capital gains are erased. The properties are awarded to the beneficiaries on a stepped-up basis equivalent to fair market value.

To get a clearer picture of the tax savings that come with a 1031 exchange, let’s take a look at the following example:

Let’s assume that an investor wants to sell a rental property for $1,000,000. The property was originally purchased 2 years ago for $300,000 but the owner still has a debt of $40,000. Let’s compare the results between a sale with a 1031 exchange and one without.

Selling Investment Property without a 1031 Exchange

Selling Investment Property with a 1031 Exchange

Selling Price $1,000,000 $1,000,000 Selling Price $1,000,000 $1,000,000Debt (40,000) Debt (40,000)Balance $960,000 Balance $960,000Original purchase price $300,000 Original purchase price $300,000Taxable gain $700,000 Taxable gain $700,000Assume a combined tax rate of at least 25% (federal capital gain, depreciation recapture gain and state) x25%

Combined tax rate(federal capital gain, depreciation recapture gain and state) x0%

Capital gains tax due $175,000 (175,000) Capital gains tax due $0 (0)Net cash left for investment $785,000 Net cash left for investment $960,000

Current tax savings $175,000

Result: By selling the property through a 1031 exchange, the investor is able to defer capital gains tax and use those savings to purchase a replacement property worth at least $175,000 more than what they could afford with after-tax dollars.

The 1031 exchange can be a complicated process, but RKC PROPERTIES can make it simple.

RKC PROPERTIES has over 30 years of experience in the real estate industry.

We specialize in acquiring, renovating and managing high-yielding properties on behalf of our clients.

Our disciplined approach to real estate investing revolves around a methodical investment strategy that has been proven to be effective in any market condition.

RKC PROPERTIES’ operations are 100% transparent and we pride ourselves in keeping our investors informed through every step of the process.

With our expertise and decades of experience, RKC PROPERTIES can guarantee seamless 1031

exchanges that will help you maximize real estate ROI.

The Exchange ProcessI. RKC PROPERTIES will help the investor define their investment objectives and

determine the best exchange strategy to use. There are different types of 1031 exchanges, the most common being the delayed exchange where investors are given 180 days to sell and replace property.

II. Our team will prepare the required documentation and help the investor find a suitable replacement property. Under the delayed exchange option, identification of a like-kind replacement property (or properties) must take place within 45 days. Investors will be required to identify their preferred replacement properties in writing.

III. Once the investor’s relinquished property has been sold, RKC PROPERTIES will hold the net proceeds in escrow. The deed will be transferred from the investor to the buyer.

IV. When the investor finally closes on a replacement property, RKC PROPERTIES will wire the exchange funds to complete the transaction. The deed will be transferred from the seller to the investor.

There are several types of 1031 exchanges. RKC PROPERTIES has expertise in the following:

Gain access to suitable “like-kind” properties

Minimize your tax liabilities

Consolidate gains from several properties into one efficient property

Easily connect with a Qualified Intermediary

Simultaneous exchanges

Delayed exchanges

Construction or build-to-suit exchanges

Reverse exchanges

By conducting a 1031 Exchange with RKC PROPERTIES, you can:

Would you rather pay a lot in taxes or put more money in your investment portfolio?

Talk to us at RKC PROPERTIES today

800-401-2274 info@rkcproperties.net