Examples of A 1031 Exchange
An investor buys a strip mall (a commercial property) for $200,000 (his cost basis). After six years he could sell the property for $250,000. This would result in a gain of $50,000, on which the investor would typically have to pay three types of taxes: a federal capital gains tax, a state capital gains tax and a depreciation recapture tax based on the depreciation he or she has taken on the property since the investor purchased the property. If the investor invests the proceeds from the $250,000 sale into another property or properties (without touching the proceeds and using a Qualified Intermediary), then he would not have to pay any taxes on the gain at that time.
An owner of a detached house on 3 acres (12,000 m2) is transferred by his employer to another state. Rather than selling the home, which will no longer be his personal residence, he chooses to rent it out for a period of time. After ten years, he decides that he wants to sell it but, at the same time, he has a grown son who will be going to college in yet another state. He decides that he wants to buy an apartment building in the college town for the son and other students to rent while they are in school. His house has appreciated from $200,000 to $300,000. Therefore, he arranges for an IRS Section 1031 exchange, and buys the new property, thus avoiding the capital gain at that time.
Caution—in the aforementioned example, the investor would need to substantiate his or her to the IRS by showing an arm's length lease to the son and other students, and investor should declare income and take on offseting depreciation deduction.
In addition to the sale of real estate, selling an interest in real property may also qualify for a 1031 Exchange. An example of this would be the sale of an easement.
Read more about this topic: Internal Revenue Code Section 1031
Famous quotes containing the words examples of, examples and/or exchange:
“It is hardly to be believed how spiritual reflections when mixed with a little physics can hold people’s attention and give them a livelier idea of God than do the often ill-applied examples of his wrath.”
—G.C. (Georg Christoph)
“In the examples that I here bring in of what I have [read], heard, done or said, I have refrained from daring to alter even the smallest and most indifferent circumstances. My conscience falsifies not an iota; for my knowledge I cannot answer.”
—Michel de Montaigne (1533–1592)
“Ideal conversation must be an exchange of thought, and not, as many of those who worry most about their shortcomings believe, an eloquent exhibition of wit or oratory.”
—Emily Post (1873–1960)