By: Mark Casey
Boulder/Denver AREA Commercial Member
As AREA members we need to be aware of the benefits of the Tax-Deferred Exchange, under IRS Code 1031. The IRS Code allows an investor to exchange one real estate investment asset for another while deferring the gain and depreciation recapture on the sale of the first property. With 15% federal capital gains tax, plus the applicable state tax rate, plus the recapture of depreciation at your ordinary income tax rate, the potential for deferring taxes is huge… particularly if you have held the property for many years. On the sale of an investment property that has been held long enough to generate significant appreciation while a significant amount of depreciation has been taken, it is not unusual for 30% to 40% of the proceeds from the sale to be paid in taxes if the seller does not 1031 exchange into another property.
The IRS Code stipulates properties eligible for a tax-deferred exchange must be like-kind. For real estate held for investment, that gives you a lot of latitude. An investment home owned in California can be exchanged for an office building in Colorado. Raw land can be exchanged for a fully-developed building. Your 100% ownership in the building you are selling can be divided into two or three properties to create diversification. Even foreign to foreign investment properties may qualify for 1031 Exchange treatment. As long as the exchange is done properly the options for tax-deferred investments are virtually limitless.
The key to a successful exchange is planning ahead. Please feel free to contact me: Mark Casey at mark@TenantWisdom.com or call me at 303-665-6000.