What are the benefits of exchanging vs. selling outright?
A Section 1031 exchange enables you to postpone taxes from the sale of qualifying properties. By deferring the tax, you have more money available to invest in another property. You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on the current gains.
Is “tax deferred” the same as “tax free?”
No. With a 1031 exchange, you defer paying the capital gains taxes on your relinquished property but the tax basis is carried over to your replacement property. When you sell the replacement property without doing an exchange, you will pay the tax at that time.
What do you mean when you refer to “basis?”
Basis is the initial investment in the original property, increased by capital expenditures and decreased by allowable depreciation or cost recovery. It is used to calculate the amount of capital gain you will realize. For example, if you originally purchased a property for $250k and $200k of the $250k was dedicated to improvements and real estate (depreciable) and the other $50k was land (non-depreciable), you could depreciate the $200k over 27.5 years. Depreciating the $200k over 5 years would provide you with an “adjusted basis” of $213,636 in the property.
Can I completely avoid the tax in a 1031 exchange?
Under current law, the “stepped up” basis resets the basis to the market value at the time of death of the original owner. However, any gain above the fair market value of the property at the time of death of the original owner is still taxable. If sold at a gain, the heirs would still be subject to taxes using the stepped up basis.
In a partnership, if we sell our property, can we go our separate ways in an exchange?
No, you must first formally dissolve the partnership and deed out the interest as tenants-in-common before you do an exchange. Then you can sell/exchange your interests separately. However, if the partnership wants to stay together to buy another property, that qualifies for an exchange. If this is your scenario, advance planning is necessary. You should always consult your attorney or tax advisor regarding your personal situation.
If you need more information about a 1031 Exchange give us a call at 866-405-1031 or visit our website www.1031alternatives.net.
This material is neither an offer to sell nor the solicitation to purchase any security. Purchases may only be made upon thorough review of risks in merits located with in the Private Placement Memorandum or Prospectus. Pictures located on this presentation are not current offering and are used for illustration purposes only. This presentation is for illustration purposes only and is not intended to replace any competent tax, legal or financial planning advice. Securities offered through Pacific West Securities, Inc. – Broker Dealer – Member FINRA/SIPC.
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