Capital Gains Tax Consequences of Not Doing a 1031 Exchange

Many people want to know how much they are going to have to pay in capital gains taxes if they don’t do a 1031 exchange? We take a look at capital gains taxes and 1031 exchanges in this article.

Layers of Taxation

There are different layers of taxes you have to look at. The first is how much of the property that you’re selling has appreciated in value. The portion of the gain that is from appreciation or natural increase in value over time, is taxed at a maximum rate of 20%. Congress also has an investment income tax of 3.8%, which may be applicable to some or all of that appreciation so you could rough it in or say rule of thumb is a 23.8% appreciation.

Recaptured Depreciation

Then there’s a portion of the game that relates to depreciation. That’s the deductions you have been taking over time for the theoretical wear and tear on the property. So incremental, over time you’re lowering your basis every year due to these depreciation deductions. That’s called depreciation recapture. The maximum federal right now is 25% on the recapture of depreciation.

So on the appreciation, the upward climb, we’ll say 23.8%. On depreciation, we’ll say a maximum rate of 25%. However, some of the gain may be taxed at a maximum rate of 39.6%, which is the Federal Ordinary Income rate for §1245 Personal property (either tangible or intangible).  A gain on the disposition of section 1245 property may be treated as ordinary income to the extent of depreciation allowed or allowable on the property. On top of all of that, if you’re in a state that taxes such as Minnesota or California, these states have their own layer of taxation around 10%.  So if you’re going to rough it in, you’re going to be giving away 45%-50% of your gains in federal taxes.

Rather than taking that tax hit, a 1031 exchange can help you roll that gain over into a new property and avoid the tax hit.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can the 1031 Exchange Deadlines be Extended?

Many people want to know if the 1031 exchange 180 day period is a hard-and-fast deadline or if there’s flexibility to prolong the exchange period.

As a General Rule

The general rule is no, you can’t go beyond the 180th day. It is a hard and fast rule. That being said, many people have been affected by hurricanes and other federally declared disasters that are eligible for extensions under rev proc 2007 – 50.

Federal Disaster Areas

However, in some situations the executive branch will issue a notice that a certain geographic area has been declared a federal disaster area and folks that are in that area may be eligible for extensions (typically of 120 days from the date of the disaster).

Other taxpayers who are not in that geographic area but are doing business transactions within the disaster area may also be eligible for extensions, but the notices typically require the taxpayers to contact the IRS and to explain why they are directly and adversely affected by the disaster. Maybe their title company was flooded out, for example.

So you need to follow the notice issued by the executive branch and the requirements of rev proc 2007. If you do that you may be eligible for an extension but there are limits on how far that extension can go out. You should always work with a competent CPA to make sure you’re eligible for the extension and understand how long that extension is in relation to your exchange.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Record Keeping in a 1031 Exchange

A 1031 exchange allows you to defer your capital gains when selling real estate, as long as you pass your sales proceeds into replacement property. You can continue exchanging property in this manner for years, decades, or even indefinitely. But doing so makes it absolutely essential to keep full and accurate records of all your 1031 exchanges. In this article, we’re going to discuss the importance of keeping accurate records for all of your 1031 exchanges.

Always Be Prepared for an Audit

As a good rule of thumb – always be prepared for an audit. You never know when or if you’ll be audited, but it’s best to prepare yourself accordingly for the possibility. Having full and accurate records of all your 1031 transactions will make things a lot easier in the event of an audit.
In addition, make sure that your records are easily accessible and comprehensible to your heirs and/or executor, in the even that your 1031 properties end up in the hands of your estate.

1031 Exchange in St. Paul, MN

If you are looking to save money when selling real estate – a 1031 exchange allows you to defer your capital gains taxes on your sale as long as you move that money into a continued investment. This has the added benefit of keeping your money compounding and building wealth over time. Talk with one of our qualified intermediaries now to see if you are a good candidate for 1031 exchange. Our intermediaries have been helping investors with their like-kind exchanges for more than twenty years.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Deferring Taxes & Profiting from Real Estate

Investing in real estate can be very profitable, but that’s not a guarantee. You need to understand the market, know when to sell / buy, and much more. One of the best tools in a real estate investors arsenal is the 1031 exchange. In this article, we are going to discuss how to profit from real estate while simultaneously deferring taxes with a 1031 exchange.

The Purpose of Section 1031

The purpose of section 1031 of the Internal Revenue Code is to incentivize real estate investors to continue investing their money in the market (thus leading to overall economic growth as a result). There is also a direct benefit to the taxpayer conducting the 1031 exchange in that they are able to defer their capital gains taxes on the real estate sale and keep their money building wealth in a continuing investment.

The next time you’re thinking about selling a piece of real property – consider a 1031 exchange first. As long as you meet all the benchmarks, you can defer your taxes and keep your profits working for you in a bigger, better property.

Save Money on Your Next Real Estate Transaction

If you are looking to save money on your next real estate transaction, consider a 1031 exchange to defer your capital gains taxes. With more than 20 years of experience under our belts, our qualified intermediaries have the resources to ensure that your exchange goes off without a hitch. We can prepare all of your 1031 documents and answer any questions you might have. Contact our intermediaries today at our downtown Minneapolis office to get your exchange up and running.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

What to Know About 1031 Exchange Purchase Prices

In a 1031 exchange, can a person purchase several smaller properties/units (less that the purchase price of the original investment) as long as they add up to or greater than the sale price of the relinquished property? This is a great question and the topic of today’s blog.

The short answer is yes – as long as all of the multiple replacement properties add up to or are greater in Value and Equity than the sale price of the relinquished property.

The Napkin Test (with Multiple Replacement Properties)

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain:

1.   Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

2.   You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

3.   And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by:

• new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR

• investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved