Real estate investors are painfully aware that capital gains taxes can significantly dent the benefit of selling an investment property. A 1031 exchange, involving a new investment opportunity, can reduce and delay the financial impact by deferring any capital gains taxes that would otherwise be due in that tax year. These “savings” can translate to a larger subsequent investment, allowing for even more tax-deferred growth so you can fully optimize your portfolio.
For those new to investing who are wondering, “What is a 1031 tax exchange?” what follows is a primer. This information also can serve as a refresher for seasoned investors, or clear up any confusion. Precision Global Corporation also can answer any questions you have about 1031 exchanges. This is our area of expertise. We manage general and limited partnerships, and every project we take on is fully 1031 compatible.
A 1031 exchange is basically a swap of one real estate investment for another. These exchanges are allowed for qualified properties, and are outlined under Section 1031 of the Internal Revenue Code. There are no (or very limited) taxes due at the time of the exchange. Taxes instead are deferred, potentially shielding hundreds of thousands of dollars or more in real estate appreciation. Read on to learn more about 1031 exchanges and how this provision of the IRC can help you maximize future investments.
There are a few rules to keep in mind when evaluating whether a property may qualify for a 1031 tax exchange. We won’t get into every last detail here, but the first thing to know is that the properties being exchanged must be "like-kind." The IRS defines “like-kind” property as being of the same nature, character or class. The quality or grade of the properties is irrelevant, and most real properties are like-kind to other real estate. An exception is that foreign properties are not considered like-kind to U.S. properties.
To qualify for a 1031 exchange, the new investment also must have an equal or greater value than the one being sold. Another important rule: There's no limit on the number of times you can use a 1031 exchange.
While 1031 exchanges do not provide tax-free gains, the deferrals allow you to both maximize your next investment and defer your tax liabilities until you cash out, allowing you to determine when the timing is more advantageous. Keep in mind, however, that tax laws change frequently.
Precision Global Corporation focuses on a wide range of 1031 exchange properties, and specializes in investments in assisted living or memory care communities. If you're interested in 1031 exchanges — used by the world’s most successful real estate investors — contact us to request more information.