1031 exchanges are not a zero-sum game. You can have a partial deferral and a partial recognition of gain if you buy down in value.
An Example of a Partial Exchange
Let’s say that you sold a $500,000 property and your remaining adjusted basis is $200,000. Maybe you bought it for more than $200,000 but because of depreciation deductions that have whittled down your original cost basis, you now only have $200,000 in basis. When you acquire new replacement property, your old basis gets transferred to the new property. The original $200,000 in basis follows you to the new property and you only begin to defer gain to the extent that you buy up in value over and above that transferred basis. Let’s say your replacement property was purchased for $450,000. The first $200,000 of that is a wash due to the basis you carried over from the relinquished property. You begin to defer gains on the next $250,000. But that still leaves you $50,000 short of the relinquished property so you would recognize gains on that amount. It’s a partial victory, despite not deferring 100% of the gains.
If you find yourself short of deferring 100% of the gains, there are options available that can help you reach that 100% threshold. For example, you could construct improvements to the replacement property within your 180 day exchange period to increase the property value as needed.
Give Section 1031 a Try
Are you thinking about selling a piece of investment real estate but are hesitating because of the potential capital gains tax bill? If so, then a 1031 exchange might be a good option for you! Section 1031 allows any US taxpayer to defer their capital gains on the sale of qualifying real estate as long as they put the sales proceeds into a bigger and better replacement property. This benefits the taxpayer in multiple ways: by allowing you to defer your taxes and by keeping your money working for you and compounding in a continued investment property.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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