Tax Relief for Sellers

Summary: When selling investment property, using a 1031, Starker, Delayed, or Reverse exchange may allow you to indefinitely delay capital gains taxes.

Selling an Investment Property

If you are selling an investment property, you can exchange for another property held for investment and delay the capital gains tax on your profit indefinitely.

Hot Tip! What if you want to purchase a property but can’t delay the purchase until you’ve sold your current property? Using a technique called a reverse exchange may accomplish your objective.

Why exchange?

1. Leverage: Use the money you would normally pay in taxes (up to 37% state + federal) to acquire a bigger or better property. By having more money to put down, a bigger property or multiple properties can be acquired. Look at this example:

    Assume that:
  • the property was purchased for $150,000 several years ago
  • the current sale price is $250,000
  • There is an outstanding loan balance of $100,000
Sale Exchange
+ Sale price: $500,000 $500,000
- Purchase price: $300,000 $300,000
= Capital gain: $200,000 $200,000
x Tax rate: 28% n/a
- Tax due now: $46,000 $0 (deferred)
= Proceeds: $154,000 $200,000
- Loan payoff: $100,000 $100,000
= Cash to invest: $54,000 $100,000
New purchase with 25% down: $216,000 $400,000 (exchangor can buy more!)

With an appreciation rate of 10%, it would take the investor who sells outright and buys again four years to reach the property value of the investor who exchanges. The exchangor clearly has the advantage!

2. Sell later: By exchanging today, it is possible to sell in the future when there might be a more favorable capital gains rate.

3. Time value of money: Due to the effect of inflation, one dollar today is worth more than one dollar tomorrow. Instead of paying $10,000 in taxes today, pay it in the future when $10,000 is worth less due to inflation.

What can I exchange into?

Your new property needs only to be "like-kind" investment property, it need not be the exact same type or same quality as the property you sell. For example, you may exchange your old apartment building for a new commercial building, raw land, a warehouse, motel, industrial building, rental house, retail store, etc.

How does this law help me?

You are able to sell your properties without regard to taxes in order to re-invest your money in new opportunities, consolidate/diversify your holdings, or for advanced tax planning.

Basic Strategies

Consolidate: Sell several smaller properties and buy a single, larger property in order to maximize profit and minimize management headaches.

Diversify: Replace a single, large asset with several smaller properties in order to minimize risk, gradually liquidate your real estate holdings (i.e. in preparation for retirement), or spread the tax hit on the gains over several years.

Hot Tip! Maximize your deductible expenses by reversing the customary allocation of closing costs.

Advanced Strategies

Are there any other rules? You bet! Contact us to discuss your goals and we’ll design a plan specific to your needs.

See also: Tax Relief for Seniors

Important disclaimer: This is general information, not tax advice. Federal and state tax laws change frequently. We are not tax or legal advisors. Please consult a qualified tax or legal professional before acting on anything described here.

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