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Quick Guide: The 1031 Tax Exchange

Leslie Kazen - Tuesday, December 28, 2021
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To understand the 1031 tax exchange, you first need an understanding of capital gain. If we consider that an asset can be stocks, bonds, precious metals, jewelry, or real estate. 

A capital asset is something that's sold for more than its original purchase price, and this surplus is referred to as capital gain. In Forth Worth, Texas, and throughout the United States, capital gains are taxable. 

They are divided into short-term capital gains and long-term capital gains for assets held for less and more than one year, respectively.

Short-term capital gains are taxed like regular income, dependent on your tax bracket, which can be up to 37%. Whereas long-term capital gains are taxed between 0% and 20% depending on your income threshold. 

So why does this matter?

As we'll discuss in this article, the 1031 tax exchange allows you to defer capital gains tax. This means you save money!

Let's take a closer look...

What’s 1031 Tax Exchange?

The term 1031 tax exchange refers to a provision in the Internal Revenue Code (IRC) called section 1031.

Under section 1031, investors or property owners may defer taxes on the profits of properties sold to raise cash to purchase other properties under the following conditions:

  • Exchanges must be like-kind, that is, real-estate for trade, business, or investment purposes only.
  • Once the asset is sold, the exchange asset must be identified within 45 days and acquired within 180 days.
  • The 1031 tax exchange does not apply to the selling and buying of personal property.
  • It is precisely for investors or property owners who intend to sell more than one property. It will be reinvesting the gains of the sale in other properties.

Finally, any value additions to the swap, which is not real estate, otherwise known as a ‘boot,’ must be taxed and paid in the exchange year.

How 1031 Exchanges Can Be Used

1031 exchanges can be used in the following ways:

Simultaneous exchange: Purchase happens at the same time as selling.

Delayed Exchange: This uses the full allotment of time to exchange properties which would be 135 days in total (calculated from the 45 days to identify the property subtracted from the 180 acquisition period).

Reverse Exchange: This is when a property is purchased before the original property is sold.

Build-to-suit exchange: This is when a new property is built to meet the exchange needs of the investor.

Delayed/simultaneous build-to-suit exchange: A property is built before the current property is sold.

Why Do You Need to Know About 1031 Tax Exchange?

Earlier this year, president Biden proposed to double the tax rate on capital gains. This would affect nearly 500,000 households across the country and impose more stringent taxation on the highest-earning Americans.

For this reason, now more than ever, real estate investors will need to consider strategies to maximize their profits, such as through the 1031 tax exchange.

Do You Want to Start Utilizing 1031 Tax Exchange?

Suppose you want to begin utilizing property tax laws like the 1031 tax exchange for your investment property. In that case, you will need to be able to carry out timely and well-managed exchanges across the board.

Fort Worth Property Management can help you manage your property exchanges, conduct market research for the best capital gains opportunities, and provide financial reporting on your properties.

Take a look at our full services today to find out how we could save you money.