A section 1031 tax deferral allows an investor to sell a property, then reinvest the proceeds in a new property and defer all capital gain taxes. Specific conditions for the exchange state that it must be of like-kind and must take place within 45 days of the close of the sale. To understand more about how this exchange works, consider the following example:
If an investor has a $200,000 capital gain and incurs a tax liability of $70,000 in combined taxes when the property is sold, only $130,000 remains to reinvest in another property.
If the investor had, for example, a down payment of 25% and a loan-to-value ratio of 75%, the seller would only be able to purchase a $520,000 property.
If the same investor chose a 1031 exchange, however, and had the same down payment and loan-to-value ratio as above, the entire $200,000 of equity could be reinvested in an $800,000 purchase of real estate.
The exchange offers a powerful protection for investors from capital gain taxes. However, knowledge of what qualifies for a 1031 exchange, and how it works is crucial to receive the full benefits that it can offer. For example, not all real estate qualifies for the...
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