1031 Exchange Explained, South Orange County Real Estate
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The 1031 Exchange Explained

The 1031 Exchange Explained   1031 Exchange Q&A

Rules to Identify 1031 Exchange Replacement Property

Why is the 1031 Exchange important to a real estate investor?

An investor in real estate understands how important it is to preserve wealth and assets. In the frequently changing world of taxation, the investor is fortunate to have IRC Section 1031. This tax code allows the investor to exchange from one investment property to another and defer taxes on the gain. This means that a 1031 Exchange is a rollover of equity of like properties, rather than an avoidance of tax. Thus the investor continues to build wealth through real estate investment, and maintains the hard earned equity. Any tax liability through inheritance will be limited to the gains from the date of the inheritor’s acquisition, not during the years of ownership. So in essence the taxes that are saved now are never paid.

Guidelines regarding the 1031 Exchange

  • Taxpayer finds a buyer and sells the property through a Qualified Intermediary.

  • Taxpayer buys a replacement property through the Intermediary.

  • The parties may not know each other and their properties can be in different states.

  • The exchange period begins on the day the relinquished property is transferred and ends on the earlier of 180 days thereafter or the due date (including extensions) of the tax return for the taxable year in which the transfer of the relinquished property occurs.

  • The taxpayer’s agent, broker, attorney, accountant or family member is excluded as a qualified intermediary.

CALCULATION EXAMPLE:

Current Market Value

=

$ 200,000

    

Mortgage

=

$ 80,000

  $200,000

Current Market Value

Equity 

=

$ 120,000

- $150,000

Original Purchase Price

Depreciation Taken

=

$ 20,000

+$20,000

Depreciation

Taxable Gain on Sale

=

$ 70,000

  $70,000

TAXABLE GAIN

Tax on Gain at 20% = $14,000 - Other expenses/loses could affect the gain
(A property can be sold for less than purchased for and still have a gain)

Without a properly executed 1031 Exchange:

Equity ($120,000) less tax ($14,000) = $106,000 available towards purchase of a new property.

With a properly executed 1031 Exchange:

If the tax-deferred exchange of the property was properly executed, TAX WILL BE DEFERRED and the investor will have $120,000 to use towards the purchase of another investment property.

The concept of a tax deferred exchange is easy to understand. However, there are many details involved in an exchange that need careful consideration. Before taking steps towards a 1031 tax-deferred exchange, please consult your CPA, attorney, or tax advisor.
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The OC Coastal Group is an independently owned and operated member of Re/Max Real Estate Services. Information throughout this site is deemed reliable but not guaranteed for Aliso Viejo, Capistrano Beach, Corona Del Mar, Dana Point, Laguna Beach, Laguna Niguel, Monarch Beach, San Juan Capistrano and San Clemente properties.  This site may reference real estate closed sales by a brokerage firm other than the broker and/or agent who owns this web site.  By submitting your contact information on any form on this site,  you are consenting for The OC Coastal Group  to contact you even if your name is on the Federal "Do Not Call List".

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The OC Coastal Group are realtor specialists in Dana Point real estate, Monarch Beach real estate, Laguna Beach real estate, Laguna Niguel real estate, San Juan Capistrano real estate, San Clemente real estate and Aliso Viejo real estate in Coastal Orange County, California & surrounding South Orange County, CA realty including coastal golf course homes, beach properties, gated communities, 1031 exchanges, investment opportunities, income properties, ocean view estates, houses, condos & townhomes.

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