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Want to Capitalize on Appreciated Property?

CPAs & Business Consultants

Mark Perry
Mark Perry, CPA CPAs & Business Consultants

Thanks to Section 1031 of the Tax Code, a properly structured like-kind exchange allows an investor to sell a property in certain situations, reinvest the proceeds in a different property, and defer capital gain taxes. The four basic steps in a 1031 exchange are:

  1. The seller arranges for sale of property and includes exchange language in the contract.
  2. At closing, proceeds from the sale go to a qualified intermediary for a 1031 exchange.
  3. The seller identifies potential exchange properties within 45 days of closing.
  4. The seller completes the 1031 exchange within 180 days of closing.

Here’s how it works: Let’s say you have a $200,000 capital gain and incur a tax liability of approximately $50,000 in combined taxes (depreciation recapture, federal and state capital gains taxes) when the property is sold. Only $150,000 remains to reinvest in another property.

Assuming a 25 percent down payment and a 75 percent loan-to-value ratio, you would only be able to purchase a $600,000 different property. However, with a 1031 exchange, you’d be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to value ratios exist.

Contact Yeo & Yeo to learn how a 1031 tax-deferred exchange can help increase your return on real estate investments.

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