Defer Taxes with 1031 Exchanges Montrose CO

Anyone who purchased investment real estate before our nation’s recent housing boom has likely seen significant capital appreciation, with property values jumping from $200,000 to $400,000 in many areas. In addition to appreciation, investment property owners also have the benefit of writing off a portion of the investment in depreciation each year.

Investors contemplating selling such properties could face both a significant capital gains tax on the property’s increase in value and a depreciation recapture tax on the funds that were written off each year.

A handy tool for deferring those taxes is available, thanks to section 1031 of the tax code. A 1031 exchange, also called a “like kind” or tax deferred exchange, is a legal way for investors to defer taxes on gains in property used for business or investment by rolling gains over into another similar, or “like kind,” property.

“Section 1031 was a business decision by the IRS. They wanted to encourage people to keep investing,” Karin Church, vice president of Investment Property Exchange Services, Inc., said. “And if the IRS were to impose capital gain taxes when [people] sold an investment property, that would discourage people from selling, and also as part of that, discourage them from going out and buying more property. So what the IRS is looking for...is a continuation of investment.”

A 1031 exchange is a tax deferral strategy, but there is no limit on the number of exchanges that an investor can participate in. Many investors continue rolling over their gains through 1031 exchanges until their death, at which time their heirs get the property without paying taxes on the capital gains that occurred during the investor’s lifetime, Church said.

Qualifications

• Property must be used for either business or investment.
• Property must be held for the purposes of long-term appreciation and/or cash flow rather than resale.
• Exchanges must occur between like kind property (for example, U.S. investment property can be exchanged for other U.S. investment property).
• Unless all steps in the exchange will occur on the same day (which is very difficult to accomplish), a third party called a qualified intermediary (QI) or exchange accommodator is needed in order to maintain the appearance of an exchange. QI fees range from $500 to $1,500 for a standard exchange.
  

To get full tax deferral: 

• Replacement property must be of equal or greater value to relinquished property.
• Equity from relinquished property must be rolled over into replacement property.
• Investor must incur equal or greater debt on replacement property, although it may be possible to offset that debt with an infusion of cash instead.

The process

1. During the escrow process on the property the investor is selling, the investor contacts a QI and they draw up an exchange agreement.
2. The property being sold, called the relinquished property, closes and the proceeds go to the QI for holding.
3. Within 45...

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