What are 1031 Exchanges?
This combines the sale and purchase of real estate. This is the equivalent of selling a property with the funds from the sale not going directly to the seller, but instead being used for the purchase of another property or for multiple properties. This is used in many real estate transactions today as a means to increase an investor’s for purchase revenue through the delay or removal of federal income taxes which have to be paid to the government on a yearly basis. These taxes include capital gain taxes through the sale of real estate.
As a simplified example of real estate capital gains, if one property was originally purchased for $200,000 with $20,000 spent in property improvements and then after 5 years sold for $500,000 this would result in a capital gain of $280,000 minus selling and other expenses. Additionally, 5 years of the depreciation of property value is also involved in this calculation of capital gains for your taxes as yearly depreciation means yearly tax deductions. Any previous tax deduction received needs to be subtracted from future available tax deductions, for example a tax deduction as part of a 1031 exchange. Property depreciation should be calculated by your accountant, but if a property is calculated for depreciation based on $220,000 with taxable deductions spread over 39 years, then yearly tax deductions are $5,641.03.
Simply stated a monetary gain at the time or year of your sale will be taxed both federal and state. However, a 1031 exchange when done through a licensed intermediary with the capital gains from the property sale only being reinvested in like kind property, means instead of paying increased taxes for the year of your sale, the tax saving can be used for the purchase of newly owned property. If your accountant calculated and then verified capital gain on the sale of your property is $400,000 and your federal and state income taxes for this are 33%, this will result in total taxes to be paid of $132,000. With the use of a 1031 procedure, this taxable amount of $132,000 can instead be reinvested and used as part of the funding of newly purchased and owned like-kind property.
For assistance with a tax deferring or saving 1031 exchange you can contact California licensed real estate broker, Mark Sanguinetti. Mark can work with your chosen intermediary who is needed in a 1031 exchange transaction. One possible suggestion for a needed intermediary is Asset Exchange Company and Leonard Spoto. For income tax calculations and verification of your transactions, your accountant is also needed. Your own chosen legal counsel can also be part of your exchange.