A 1031 Exchange is used by experienced real estate investors to defer paying their capital gains tax upon the sale of an investment property. It works by exchanging the first property (the relinquished property) for a new property that the investor wishes to acquire (the replacement property). By entering into a 1031 Exchange for this transaction, a taxpayer defers their tax to the liquidation of the replacement property at some time in the future.
The taxes deferred through the process are:
- Federal Capital Gains
- State Capital Gains (except in the commonwealth of Pennsylvania)
- Recapture of Depreciation
- 3.8% Net Investment Income Tax
In many cases, the taxes deferred can be 30% or higher. The 1031 Exchange allows you to retain wealth by allowing you to keep those tax dollars and use those funds to reinvest into new replacement property, increasing your purchase power.
For more information, please reach out to your tax professional for specific questions or contact the professionals here at Security 1st Exchange for assistance.