What Can You Expect to Gain From a 1031 Exchange?

The biggest and most important question taxpayers ask themselves before doing a 1031 exchange is "what can I expect to gain from this transaction?" That's our question for today's 1031 education article.

Defer Your Capital Gains

The primary benefit that you gain is that you are deferring indefinitely the capital gains and state income tax liabilities that you would ordinarily have if you were recognizing the gains on the sale of property.

1031 says that no gain or loss shall be recognized if you dispose of a property that's been held for a qualified purpose (investment or business purposes), and you acquire a like-kind property that’s also going to be held for investment purposes. The gain for you is that these profits are not taxable in the current year of disposition and may stay deferred indefinitely.

Avoid Unnecessary Taxes

So the big gain is that you don't have to pay taxes unnecessarily upon the sale of your relinquished property and you defer those gains and roll them into your new replacement property, which may never be sold. If it is disposed of, it may be disposed of after your passing, so that your heirs will have that property with a stepped up basis, effectively eliminating the tax perpetually.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Whiteboard Video - The 1031 Exchange Drop & Swap

In this whiteboard video, we explain how 1031 exchange drop and swaps work. Check out more 1031 whiteboard videos here.

• Start Your 1031 Exchange: If you have questions about drop and swap exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Case Study: Doing a Partial Reverse Exchange

A client recently came to us with the following 1031 exchange situation and question: We are currently in the middle of our 1031 identification period. If we buy something now and sell another property after that in the same area is it possible to put the revenues from that toward the mortgage of that same property, or do we need to buy another individual property? The property we want is more than we wish to spend, but if we sold our other holding it would be more doable.

Doing a 2nd Potential Exchange

As to the second potential exchange of another relinquished property, generally, the IRS would not view paying off debt on a property that you already own as being an ‘exchange’ because you have not received anything new that you do not already own.

If the timing works, you could split the replacement property into a part reverse exchange, and hold out a portion of the replacement property to complete another 1031. Read more about this possibility here. 

• Start Your 1031 Exchange: If you have questions about 1031 identification periods, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Keeping 1031 Exchange Funds Separate

Consider the following 1031 exchange scenario: A taxpayer is considering a 1031 exchange out of farmland and into a residential rental property. The replacement property may be of greater value than the relinquished property. Can the rental percentage be prorated according to the amount of the relinquished property and the remainder be used for personal use?

Keeping 1031 Funds Separate

The funds from the sale of the relinquished property should be used exclusively for the purchase of qualifying like-kind property that is held for investment or business purposes.

It may be possible to by a two or three unit rental property and to bifurcate it for part 1031 and part personal use. However, it is important to use non-1031 funds to pay for the personal use portion.

Further Reading

For further reading on this topic, please follow the links below:

• Step-by-Step Description of the Typical Exchange Process

• Copy of our 1031 Brochure

Start Your 1031 Exchange: If you have questions about 1031 exchanges of rental property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can I 1031 Exchange a Property that was Originally Intended to be a Rental?

A client of ours recently came to us with the following situation. The client had an investment property that was originally intended to be a rental, but after going through renovations they felt like it might make more sense to sell. Could this qualify for a 1031 exchange?

Maintaining the Right Mindset

The simple answer is yes. If you have maintained a mind-set to hold the property for a qualifying purpose of “investment or business purposes,” then you could continue with a 1031 tax deferred exchange.

There is no minimum required period of time that the relinquished property must be owned. For the IRC 1031 to qualify, you must have had the intention (before closing) of holding property for investment or for use in a trade or business.

Tax Treatment of Repairs and Improvements

The client was also concerned about how all the money they put into the property in repairs and improvements would be treated from a tax perspective.

These amounts may be tax-deductible in the year incurred if they are deemed repairs. Conversely, they may be deemed as capital improvements which would increase the client’s basis in the property and are recouped more slowly through depreciation.

It is always a good idea to talk to your accountant about the proper tax treatment for these expenses. Generally, you are not allowed to reimburse yourself for these repair costs with 1031 funds at closing (without adverse tax consequences).

• Start Your Exchange : If you have questions about 1031 exchanges of rental property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved