about exchanges

INTERNAL REVENUE CODE SECTION 1031

Under Internal Revenue Code Section 1031, a properly structured exchange allows an investor to sell a property and to reinvest the proceeds in a new property and to defer all capital gain taxes.

Internal Revenue Code Section 1031 states:

In a Forward Delayed Exchange, the Relinquished Property is sold, and the proceeds are used to purchase the Replacement Property within certain timelines. To qualify for tax deferral, the sale proceeds must be held by a Qualified Intermediary between the sale of the Relinquished Property and the purchase of the Replacement Property.

Exchanges protect investors from capital gain taxes as well as facilitate significant portfolio growth and increased return on investment.
           
For a simple example, Taxpayer A decides to sell an office building that he has owned as an investment for 5 years. He originally purchased the property for $100,000 and it is now worth $850,000. His tax advisor has advised that he engage in a tax deferred exchange, thus deferring payment of capital gains taxes. Taxpayer A finds an apartment building valued at $3,000,000 for his Replacement Property. Taxpayer A successfully completes the exchange process and does not pay capital gain taxes in the amount of $112,500 (15% capital gains tax on $750,000 profit.) Taxpayer A is able to purchase the apartment building leveraging the net proceeds from his office building.

If Taxpayer A replaced his property with 25% down, he would be able to purchase a property worth $450,000 more using a 1031 exchange. 

As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitate significant portfolio growth and increased return on investment.

In order to access the full potential of these benefits, it is important to have a comprehensive knowledge of the exchange process and the Internal Revenue Code.

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