1031 Exchange

You might ask, " The market is doing great, why should I consider selling or doing a 1031 exchange?"

Well, just like we need to get a physical examination each year to ensure we are in good health, our investments also need an annual check-up to ensure they are functioning well and according to our desired goals.

Below are 3 motivating factors, any one of which might indicate that it's time to get out of your present real estate investment and into another.

1. Incurable Problems
- It's probably time to move on if your property has problems you can't cure. These problems may include less than desirable or deteriorating neighborhood, major expenditures needed to update the building, etc.
- It is much easier to sell a property with these problems in a good market. Don't wait till the market is in a downturn to sell. It may be too late.

2. Loss of Depreciation Benefits
- If you have been increasing rents each year, then your cash flow should have increased too. Unfortunately this means that your taxable income has also increased (since the amount of depreciation allowance does not change)
- You might want to find another property that will provide a better tax shelter.

3. Increased Equity
- If you've owned your property for a year or more, then your equity has increased tremendously thanks to a combination of appreciation and mortgage principal reduction.
- To make the most of this increased equity, you should consider transferring this equity into a much larger property, thus transforming your present investment into a much larger one.

What is a 1031 exchange?
A 1031 exchange is an option available to investors to defer capital gains, by exchanging your current investment property (one or more) for another (one or more) investment property.

It’s like Monopoly where you trade in 4 green houses for 1 big red hotel!

The rule is that you have to identify the new property within 45 days of closing on your current property, invest all the cash and sales proceeds into the 2nd property and close within 180 days.

The number "1031" comes from Section 1031 of the Internal Revenue Code that contains this law.While the thought of deferring taxes might be appealing to many investors, there are also some compelling reasons to sell.

One compelling reason to sell is that capital gains tax rate is now at a very low 15% (5% for taxpayers in the 10% and 15% tax bracket), thanks to the new tax cut that President Bush signed into law on May 28, 2003.

This low rate will not last forever. This change applies to capital assets that are held more than one year and sold or exchanged at a gain (including any installment payments received) on or after May 6, 2003 and before January 1, 2009.

Word of Caution: The information stated on this website is for general information purposes only. The subject of taxation is complicated and should be discussed with your tax counsel. We are not tax experts nor do we claim to be. The tax laws change frequently and must be referred to prior to entering into any sales contract. Please consult with your tax specialist before entering into any binding sales contract.