Bankers Exchange Services

If you are planning to sell your investment property and reinvest in other investment property then you should consider a 1031 tax deferred exchange. People that own rental and investment property have many reasons for wanting to sell it. They may own a single family home with a good rental history and significant appreciation and decide that they would like to move up and acquire an apartment building as part of a wealth building strategy. Or they may have relocated their personal residence and now find that it is difficult to manage a rental property in a different geographic location. Some people, particularly retirees, find that they no longer want to be landlords and exchange out of their investment property and reinvest in Tenant in Common structured transactions which are fully managed for them and qualify for 1031 exchange treatment.

The following is an example of a rental townhouse that the owners bought 10 years ago:

Original Purchase Price $199,000.00
Plus: Capital Improvements $100,000.00
Less: Accumulated Depreciation $30,000.00
Total Net Adjusted Basis $269,000.00

New contract sales price $450,000.00
Less: Net Adjusted Basis $269,000.00
Less: Selling expenses $31,500.00
Total Capital Gain $149,500.00

Depreciation Recapture @ 25% $7,500.00
Federal Capital Gains @ 15% $22,425.00
State Capital Gains (CA) @ 9% $13,455.00
TOTAL TAXES DUE $43,380.00

Contract Sales price $450,000.00
Less Cost of Sale (commission, etc.) $31,500.00
Less Loan Payoff $139,000.00
Proceeds from Sale $279,500.00
Less taxes due on Capital Gain $43,380.00
Net Proceeds after taxes $236,120.00

The above example illustrates, that this owner would benefit from doing an exchange since it is their intent to buy another piece of investment property and an exchange would allow the seller to defer the payment of the $43,380.00 in taxes and would increase the amount of proceeds to $279,500.00. This in turn allows for a larger down payment and increased buying power on the new investment property.

In order to fully defer the capital gains taxes when doing an exchange you will need to:

1. Buy replacement property that is equal or greater in value than the property being sold
2. Use all of your exchange equity to acquire the replacement property
3. Obtain a loan on the new property that is equal or greater than the loan balance on the property being sold

There are many variables that may be unique to your situation so always check with your tax advisor to determine whether or not a 1031 tax deferred exchange is necessary or appropriate. 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.

Please contact Bankers Exchange Services directly with any questions – (877) 989-1031