Have you been wondering what all the talk is about when you hear 1031 Tax Deferred Exchanges?  Does it sound complicated?  Do you have property that you are thinking of selling, but wonder if you should exchange it instead?  Would you like to sell without paying capital gains tax on your property?

Let me put your mind at ease.   With the help of an experienced Realtor and a qualified intermediary (or facilitator), you can be growing your real estate assets and your fortune, without paying capital gains taxes.

Let me give you an example:  Let's say you own a small 2 bedroom house that you have been renting out at $900.00 per month . You purchased the property  5 years ago for $100,000.   The property has appreciated in value now to $400,000.   You are thinking of selling it and taking the equity and buying a 4-plex that you can rent for $4800. per month. 

Wait!    

Before you list that first property for sale,  talk to your accountant about the tax consequences of the sale and then find a good Realtor who is knowledgeable about 1031-Tax Deferred Exchanges.  You could save yourself thousands of dollars!!

In this instance, the first property has a gross gain of $300,000. After deducting for sales costs and adjusting for depreciation taken, the gain would be $250,000.  If the federal tax rate is 15% for an individual on appreciation and 25% on depreciation recapture, you can see that the taxes to be paid would be substantial. (This does not take into account the savings on your State income taxes, as well).

However, if you were to set up the sale as a 1031 tax deferred exchange and the gain were transferred to a new "like-kind" property, those taxes would be deferred.

The Exchange Requirements are fairly simple:

1. Purchase equal or greater in net sales price (value)
2. Reinvest all of the net equity in replacement property.
3. Obtain equal or greater debt on replacement property. (exception: a reduction in debt can be offset with additional cash from exchanger, but increasing debt cannot offset a reduction in exchange equity.)

So, our investor who owns the 2 bedroom rental house could find a 4 -plex say for $500,000 and put the equity from the sale of his house into it ( and even take some cash out - yes he will pay capital gains tax on that amount).  He has now raised his income and his Net value and has deferred paying the capital gains taxes.

There are other rules involved relating to the number of days an exchanger has to find replacement property and for closing escrow.  For this information and for a free information pamphlet on 1031 Tax Deferred Exchanges, please contact Joanie Lehr at (808) 965-6244 or email her at:  This e-mail address is being protected from spam bots, you need JavaScript enabled to view it