Should you sell your investment using a 1031-tax deferred exchange?

Real Estate Broker/Owner with Legacy real estate CA BRE#00886348

A few years ago, many were seeing their real estate investments appreciate at incredible rates, and in turn, were doing 1031 tax-deferred exchanges to defer their capital gains liabilities into new investment properties. But in today's market, many investors see limited or no appreciation in their investment property. In times like this, does it make sense for an investor to sell their property and do a 1031 exchange? In many cases, the answer is "yes."

With almost all real estate sales involving improved property, there is the recapture of depreciation. Section 1250 of the Internal Revenue Code requires that depreciation be recaptured at the current rate of 25%, which is higher than the current long-term capital gains rate. For this reason, the ability to defer the recapture of depreciation may make a 1031 exchange very attractive.

There are even more reasons to consider doing a 1031 tax-deferred exchange in a down market:
  *Portfolio diversification (i.e., selling one larger property to acquire numerous smaller properties at today's prices) or relocating investment properties to another area of the country with faster appreciation,
  *Exchange raw land which produces no income for an improved property which can be rented to create positive cash flow,
  *Exchange into a property that can be used professionally. For example, selling a single-family rental property and purchasing a new property that can accommodate your business, or
  *Exchange from fully depreciated property into to a higher valued property that can be depreciated further.
The value of a 1031 exchange is considerable, even in a down market. Leveraging the cash that would otherwise be forfeited in capital gains taxes and/or depreciation recapture makes sense in any market and a 1031 exchange is the vehicle to get it done.

Important Date to Remember!
For relinquished property transfers occurring after October 17, 2008, the exchangor may need to obtain an extension of his or her tax return due date in order to receive the benefit of the entire 180-day exchange period. This will apply only in the event that the replacement property will not be acquired prior to April 15, 2009 (for calendar-year non-corporate taxpayers). Please consult your tax advisor for precise guidance on your particular situation.

Brian Ripp, CRS, GRI, Broker - your Bay Area Realtor  Serving Fremont, Newark, Union City&surrounding communities. Real Estate&Property Management.

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