Broker Specializing in 1031 Like Exchange
Section 1031 of the IRS code provides an amazing wealth building opportunity for Real Estate investors which most people are not aware of or don’t understand fully. If implemented correctly, an investor is able to defer 100% of taxes when selling Real Estate and thus create additional capital.
My name is Rick Sarouk, licensed broker and certified appraiser with RS Real Estate Group in RE/MAX. I specialize in helping Real Estate investors and owners to sell and buy property under a 1031 Like Kind Exchange ( the concept of Like Kind Exchange is defined below). My team and I service the entire Los Angeles and Orange County. However, we are now setup to assist investors all over the nation due to our network of experienced and qualified 1031 exchange professionals. Go to How to Avoid Capital Gains Tax on Rental Property for more information.
Let us break down the 1031 exchange process by explaining what it is and how it works so that you will understand the general procedure and see how it can work to your financial advantage.
What is a 1031 Exchange
Within careful defined limits, a 1031 exchange permits you to carry forward the gains you have made on one property into another one, deferring capital gains taxes, thus, allowing the full use of your equity in the acquisition. An exchange is more advantageous than the regular sale of one property and the purchase of another.
1031 Exchange Example:
Let’s assume you acquired an improved property for $800,000 10 years ago and intend to purchase another improved property. It has a current mortgage balance of $600,000 and has appreciated to $1,800,000. During the period you owned the property you have taken depreciation deductions of $100,000. Your long-term capital gains tax would total $175,000 calculated as follows:
$1,00,000 appreciation gain x15%=$150,000;
$100,000 depreciation recapture x25%=$25,000.
Let’s dig deeper and look at the table below comparing a regular transaction vs doing a 1031 exchange to really see what’s happening.
|Current Value||$1,800,000||$1,800,000||Mortgage payoff||($600,000)||($600,000)||Taxes on $1,000,000 depreciation|
recapture @ 15%
|($150,000)||deferred||Taxes on $1,000,000 depreciation|
recapture @ 25%
|(25,000)||deferred||Available for reinvestments||$1,025,000||$1,200,000||Value of replacement property|
assuming 300% down
The Concept of “LIKE-KIND” Exchange
Like kind does not mean “exactly the same,” particularly with the exchange of real property. A single family rental unit, for example, may be exchanged for other real property like a warehouse, retail center, office building, farm; or even a leasehold interest in real estate of 30 years or more. Most real property is considered “like-kind” to other real property. “Like-kind” limitations on personal property are much more restrictive.
Identification Period – Time to Find & Locate New Property
The replacement property must be identified within 45 days of the transfer of the first relinquished property. In laymen terms: You have 45 days to locate and enter escrow on a new property.
Exchange Timeframe – Time to Complete Purchase of New Property
The acquisition of your replacement property must be completed by the earlier of:
- 180 Days of the transfer of your first relinquished property or
- The due date of filing your federal income tax return for the year in which you transferred the first relinquished property including extensions.
1031 Fully Deferred Exchange Rule
For your exchange to be fully tax-deferred, your replacement property must be equal to or greater in value and equity than your relinquished property. The debt on your replacement property must also be equal to or greater than the debt on your relinquished property, unless cash is added to offset debt.
When you hire me to represent you in the selling of your property you are not only hiring my company but also a whole network of professionals who specialize exclusively in 1031 exchanges. I have put systems in place to make the whole exchange process as comfortable and straightforward as possible for my clients. You will be working with the best Escrow & Title companies in the nation to handle every facet of the transaction.
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