At Northstar Funding in Hoboken, NJ we believe that selling property shouldn’t cost you a fortune in capital gains taxes. A 1031 exchange, also known as a tax-deferred exchange, is a strategy we employ for selling one qualified property and then using the proceeds to acquire another qualified property without immediately incurring a capital gains tax liability.
Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
To understand the powerful protection a 1031 exchange offers, consider the following example:
An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
Don’t Throw Your Money Away
1031 exchanges allow investors to defer the tax on real estate-related capital gains until sometime in the future. When used correctly, a 1031 exchange can be a highly effective wealth-building tool, allowing you to re-invest your hard-earned equity now – when you need it.
If you need help with a 1031 exchange, let the real estate team at NorthStar Funding in Hoboken, NJ help. We have the knowledge to guide you through the complex and confusing regulations surrounding 1031 exchanges while working to ensure that your investments and your best interests are protected. Call us today for more information or to schedule your one-on-one meeting.