At Riverside 1031, it’s about confidence and simplicity. You’re looking to hold onto your assets and keep more of your money, but not at the expense of layers of legally added complexity. That’s why we’re focused on taking our clients from start to completion smoothly and methodically by drawing on our considerable resources instead of depleting yours.
Introduction to Section 1031
Simply put, a Section 1031 Exchange is a transaction in which you sell an asset, and instead of using the capital to purchase another asset, you use the capital to pay for taxes on the profit you make from the sale of the first asset. For example, if you purchased a commercial property for $100,000 and it now sells for $300,000, you use the $300,000 proceeds from the sale to pay your $100,000 in capital gains taxes.
When should I do a Section 1031 Exchange?
Buying and selling property for capital gains can be a complicated process. In the past, it was very difficult to understand and execute a Section 1031 Exchange, so our goal at Riverside 1031 is to make it easy.
The first thing you’ll want to consider is the type of property you want to sell.
What is a Section 1031 Exchange?
The process of completing a Section 1031 Exchange will be outlined in Part 3, but in a nutshell, a Section 1031 Exchange allows an individual to sell off a property that may be held by him or her and redirect those proceeds to another property. This allows you to shift a portion of the taxable basis of the property you’re selling from your taxable income to your capital gains. For example, if you own a home worth $250,000 and intend to use the proceeds of the sale to purchase a property worth $400,000, you would sell your $250,000 home for $150,000 (Section 1031 valuation), a net capital gain of $100,000. You would then sell your $400,000 home for $450,000 and use the $150,000 gain to buy $125,000 of investment properties.
How does a 1031 Exchange work?
1031 Exchange transactions are exempt from capital gains taxes and capital gains withholding, thanks to Section 1031 of the Internal Revenue Code.
What kind of assets are eligible?
Qualifying assets for 1031 Exchange include real estate, securities, collectibles, etc. assets. Many sellers, however, don’t know what types of assets are eligible or that they have to pay a transfer tax before moving these items through. That’s where we come in.
You can begin the 1031 Exchange process by contacting our Realtor who can help educate you on the matter. Then, we can arrange to transfer your qualified property into our real estate portfolio and sell it with the IRS covering the 1031 or Capital Gains taxes and, of course, your previous tax liabilities.
Cost of a 1031 Exchange
A 1031 exchange can cost hundreds of thousands or even tens of millions of dollars in fees and taxes, depending on the complexity of the investment. When you list your property, you can list your profits or losses on Schedule K-1, and the IRS allows you to continue deducting up to $1 million for capital gains on any 1031 exchange sold for a profit and $250,000 on any 1031 exchange sold for a loss.
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Riverside Abstract is geared toward folks with well-documented and significant cash-flow challenges. We realize that not all investments can make 1031 work for them, so we’ll tailor an investment plan to fit. The requirements are simple. You just have to hold the property for at least one year, and the property has to be income-producing.
Why would you want a 1031 Exchange?
1031 exchanges are simple, tax-efficient solutions that let you maintain your wealth while generating tax-free capital gains. A great example is your home. You can sell it, buy a different one and donate the profit to charity. This potentially massive donation will generate a significant capital gain and be taxed at only a 15% tax rate. Then, when the next opportunity comes along, you can buy your original property again. No more headaches with claiming and paying capital gains on your previous sale!
How can you use a 1031 Exchange?
If you have an existing home, a small business or something else you can no longer use for the purposes you want it for, you should consider a Section 1031 Exchange.
Conclusion
If you’ve found the explanation above a little overwhelming, rest assured we’ve worked hard to make sure the information is accessible to every level of the asset owner.
Some of the information above might have been a little eye-opening, and we don’t expect everyone to agree with everything. If we could change our views, would we? Of course, if we didn’t agree with something, we’d bring you that information so you could make your own call.
But, we do feel confident that if you’re interested in simplifying your process, we’ve been helpful here and can point you in the right direction. If that’s not for you, there are many other options out there that can make your transaction go more smoothly. It really is that simple.
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