Today I spoke with an Investor who is facing the realities of today's real estate market. This investor has owned rental income property for the last 20 years. Having completed one 1031 Exchange into the property currently owned, the question that was posed was: I was told that the taxes just go away after a certain amount of time, is that true?
I had to tell the Investor that although the real estate market has been in a downturn the IRS expects any deferred taxes and depreciation recapture to be paid upon the sale the rental income investment property. I explained that if the property was sold and another purchased that the depreciation and the gains could be "carried-over" to the next investment property through the continued use of a 1031 Tax Deferred Exchange. Since this particular investor had owned the property for substantial number of years the depreciation recapture tax could very well be a sizable amount.
Each day I receive calls from investors, that have previously participated in a1031 Tax Deferred Exchange, that have been misinformed that the taxes will "just go away".
I encourage all investors to speak with their tax consultants when they are contemplating selling investment real estate especially rental income producing property. When discussing the tax situation on a particular real estate investment asset I encourage investors to be certain to ask two questions. They are:
1. What is my capital gain tax going to be if I sell this property and do not participate in a 1031 Tax Deferred Exchange?
2. What is my recapture tax going to be if I sell this property and do not do a 1031 Exchange.?
In today's market there is a great amount of discussion relative to the "low" capital gain rate of 15%, however may investors are unaware that the "other" tax in rental income producing investment property is the larger tax -- 25% Depreciation RECAPTURE TAX.