Bankers Exchange Services

If you plan to sell your investment real estate but don’t feel that you have enough gain to warrant a 1031 tax deferred exchange then ask yourself the following question. When you bought your current investment property did you exchange into it? Remember that your adjusted cost basis transferred into the currently owned property if you acquired it in a 1031 exchange. This could mean a big tax hit even if the current property hasn’t appreciated or has dipped in value since acquiring it in the exchange.

Sometimes people confuse the amount of equity they have in a property with the amount of gain. You can have very little equity in a property because you refinanced it and took cash out, and/or there was an overall drop in value, but can still have significant gain to pay taxes on.

Gain is calculated by taking the price that you paid for the property when you acquired it and adding the cost of any capital improvements you made to the property, and then subtracting out depreciation. If you exchanged into the property, you will also subtract out the amount of deferred gain from the previous exchange. This will give you roughly what your adjusted cost basis is. It is the difference between this adjusted cost basis figure and your current contract sales price (less expense of sale costs*) that will determine your capital gains tax. It is possible to have a significant gain in a property with little or no equity.

The purpose of a 1031 exchange is to defer Federal, and in most cases state, depreciation recapture and capital gain income tax liabilities.

As always, check with your tax advisor to determine whether or not a 1031 tax deferred exchange is necessary or appropriate for your situation. If you decide that you need to go forward with a 1031 exchange, please contact Bankers Exchange Services and ask to speak with one of our highly qualified exchange specialists.

* Expense of sale costs would include items such as real estate commissions, transfer tax, settlement fees, etc.

For questions please contact Bankers Exchange Services at (877) 989-1031