1031 Exchanges on the Rise with Recent Increase in Capital Gains Tax
Austin, TX (PRWEB) July 09, 2013 -- With the increase in the capital gains tax that took effect this year, savvy real estate investors are revisiting a rule in the Internal Revenue Code, Section 1031. This section of the tax code details a provision that allows investors to defer the capital gains that they would ordinarily be required to pay on the sale of investment real estate. By following a strict set of guidelines, used to ensure that a property is traded for another in a given time frame, the entire amount of the gain can then be used to sell one property and purchase another, without paying taxes at the time of sale.
"We have been seeing both an increase in the number of inquiries about 1031 exchanges, as well as more people actually deciding to do them this year," states Vik Vad, a real estate broker specializing in these types of transactions. "Because the capital gains tax rates have gone up for some people, it just makes even more sense than before to take advantage of this way to protect and build your wealth."
With a 1031 exchange, the entire amount of the sale may be reinvested in the next property, and this makes it possible to leverage and buy a larger property, resulting in more income and cash flow, as well as the potential for greater appreciation. For example, suppose someone sells a rental property and has a $250,000 capital gain upon the sale, and faces a $100,000 tax bill from federal capital gains as well as depreciation recapture tax. Instead of paying the tax, the investor could enter into a 1031 exchange, and use the entire $250,000 as down payment on the next property. With a loan to value ratio of 80%, this investor could now leverage and buy a $1,250,000 property with $250k to invest, as opposed to just a $750,000 property with $150k to invest.
These exchanges apply only to investment properties, however. There are also guidelines with time constraints of identifying and purchasing the replacement properties as well. An intermediary must also be used to legally facilitate the transaction. These types of transactions are best coordinated with the help of real estate brokers who understand the process. "Find a local real estate agent in your market that understands these exchanges, and is willing to work with all parties involved to make for a smooth transaction," advises Vad. "Talk to your financial planner, as well as different qualified intermediaries to see who can best guide you in your particular situation."
With rising capital gains taxes, as well as rising property values, and subsequent higher capital gains, one thing is certain – 1031 exchanges will remain a popular method utilized by investors in the coming years.
For more information, visit 1031exchange.co , or on Facebook @ facebook.com/1031ExchangeAustin
Vik Vad, Cantera Real Estate, 512-786-7931, [email protected]
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