This Month’s Myth:
“The 1031 exchange applies only to commercial property”
This is one of the most common myths or misconceptions of Article 1031 of the Internal Revenue Tax Code that allows you to defer the taxes on capital gains when you exchange into a different investment property using most or all of the proceeds from the sale of a held investment property to acquire a different investment property.
Notice I used the term investment property. I did this on purpose because it is these words that clear up the aforementioned misconception about the 1031 exchange applying to only commercial property.
The code clearly states like kind property for like kind property, meaning investment property for investment property.
Here is a great example:
A taxpayer that owns a single-family home as a rental property is considered an investment property. While the property has most certainly appreciated after many years of ownership, there is still the challenge of dealing with turnover costs, i.e., paint, carpet and new appliances, much less dealing with problem tenants.
Many of these investors grow tired of this high maintenance and want out. Problem is they’ve owned it for more than 20 years and the property has appreciated for 2-3 or even five times its original purchase price. Consider a $200,000 house in bought in the late 1990s is now worth more than $1,000,000. Using this example, the taxpayer has a capital gain of more than $750,000 and depending on their tax bracket could be looking at as much as 30% or even more in total capital gain taxes due upon a sale, that could mean more than a quarter of a million dollars of equity built, lost in a snap!
Effectuating a Tax Deferred 1031 Exchange is the way to go because you can defer the taxes and exchange into a more passive investment property, yes, even a commercial property, that may offer diversification as well as a more profitable income stream all while preserving and even building the wealth that has been built over the last couple of decades.
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031 or email at james.bean@svn.com.
If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!
Don’t know what certain terms mean?
Click here for a Glossary of Terms: https://svn-best1031online.com/glossary/
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All information is deemed to be accurate, and not advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.