Tax Deferred Exchanges Section 1031
Great Lakes Real Estate is a CERTIFIED EXCHANGE ADVISOR (CEA) which is the distinguished designation offered through the AMERICAN INSTITUTE OF REAL ESTATE EXCHANGORS and a member of R. J. GULLO & CO., INC., which is America’s #1 Qualified Intermediary Network For Real Estate Exchanges.
Key Benefits
- Pay no capital gains tax when you sell.
- Use 100% of your equity to purchase other real estate.
- Leverage a greater value of real estate by using money you would have otherwise paid as capital gains tax.
Requirements
- You must go back into real estate.
- The replacement property must be of equal or greater value than the disposal property. However, if the replacement property is not of greater value you can still do an exchange. You would simply have to pay capital gains tax on the (cash boot) portion of your gain that is greater than the replacement property value.
- You must use a Qualified Intermediary to handle the exchange.
- You can not take actual receipt of the sale proceeds. Proceeds must past through the Qualified Intermediary.
Example of an exchange versus a typical sale:
Property Sale Property Exchange
| Basis at acquisition | 100,000 | 100,000 |
| add capital improvements | ||
| Subtract Cost Recovery (depreciation) | 90,000 | |
| Equals your adjusted basis | 10,000 | |
| Selling Price | 125,000 | 125,000 |
| Minus cost of sale (legal etc) | ||
| Minus adjusted basis | 10,000 | 10,000 |
| Equals your Gain (Profit) | 115,000 | 115,000 |
| Minus your depreciation recapture | 90,000 | |
| X Tax rate (recapture rate 25% + 8%) | .33 | |
| Equals Tax Liability (what you owe) | 29700 tax now due for recapture | |
| – Suspended Losses | ||
| Equals CAPITAL GAIN | 25,000 sell price – gain(profit) | 25,000 |
| X Tax rate (20% + 8%) | .28 | |
| = Tax Liability on gain | 7,000 tax now due on gain | |
| Total tax liability (you pay this!) | 36,700 (29700+7000) | 0.00 |
| Selling Price | 125,000 | 125,000 |
| Less Mortgage bal (hypothetical) | 50,000 | 50,000 |
| = Gross Proceeds | 75,000 | 75,000 |
| Minus Total tax liability | 36700 | 0 |
| = Net Proceeds after taxes | 38300 | 75000 |
In this example you could walk away from the sale with an addition 36,700.00 to apply to your next purchase!! This is absolutely legal and recognized by the IRS. It is specifically addressed under Sec.1031 of the Internal Revenue Code. More information is available through the IRS website.
Although it appears complicated, it really isn’t. There is very little for the seller to do. Simply state that the sale is going to be an exchange and the Qualified Intermediary does the rest!
Call or E-mail for more information or visit Russell Gullo