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1031 Tax Deferred Exchanges

By
Mortgage and Lending with Free State Mortgage, LLC

 

  corporate building

 Turn NOTHING into SOMETHING (BIG) with a 1031 Tax Deferred Exchange

Commercial real estate can be a lucrative and feasible investment strategy. For those wishing to take advantage of the current market, a device exists that can grow existing investments into lasting financial security: Section 1031 of the Internal Revenue Code allows buyers and sellers of investment property to defer capital gains taxes from a property sale by rolling the proceeds into another investment property of equal or greater value.

The 1031 exchange, as a transaction under this section is known, is governed by strict rules. To be eligible for a tax deferred exchange, an investor must:

  • Identify replacement properties within 45 days
  • Complete the transaction within 180 days
  • Use a qualified intermediary to handle the details

For tax purposes, the qualified intermediary must act completely independently of the taxpayer. By having this third party hold the proceeds from a sale for the designated period, the investor is allowed time to identify a replacement property.

Large sums of money are being left on the table every year by taxpayers and real estate professionals who overlook Section1031 exchanges. This kind of tax-deferred exchange is not just for big-time investors. People without much knowledge of real estate benefit from it by taking modest investments and making themselves into multimillionaires.

For example a person who bought two vacant lots in Las Vegas for $3,000 each. Eleven years later, sold the same lots for $30,000 each. Reinvesting the $60,000 in another real estate purchase would make them liable for approximately $15,000 approx. in capital gains taxes if they sold the lots outright. Instead, they opted for a Section 1031 exchange, which allowed them to invest the profits into the next real estate purchase. Many years and several exchanges later, the net worth is close to $2.9 million,  should the taxpayer and his wife die today, there would be no estate taxes owed.

As this example demonstrates, Section 1031 permits investors, even those with modest amounts of capital, to become financially successful and secure.

For those considering real estate investments as a strategy for putting money aside and growing net worth, Wayner's advice is simple: Know your options and ask questions.

A financial advisor may not remember to recommend a 1031 exchange when you mention investing in real estate, but if you ask, you may find that your transaction is eligible.  This is a very valuable investment option and people should be aware that it is available to them.