While there are many reasons to complete the disposition of real estate through the exchange process, the overwhelming reason is the Tax Deferral available through a properly conducted exchange.
Other reasons generally stated for completing an exchange include the following:
- Correcting a geographical problem, such as a job transfer or business relocation.
- Correcting a cash flow problem, such as moving from a property with a break-even cash flow to a property with a positive cash flow.
- Correcting a lack of diversity problem, such as having all equity in one property.
- Correcting a management problem, such as going from properties with intense management (apartment properties) to properties with less management (net-leased industrial properties)
Such a disposition sometimes is called a tax-free exchange, or a 1031 exchange in reference to the applicable IRC Section 1031, because the gain reported in the sale is not recognized in the year of disposition and therefore no taxes are paid at that time. However, the gain postponed on the exchange will be reported at the taxable disposition of the replacement property acquired, unless the disposition of such replacement property is similarly exchanged in a Section 1031 like-kind transaction.
As stated earlier in the selling section, Currently the cost-recovery recapture rate of 25 percent is applied to all cost recovery taken during the holding period. The current capital gains rate of 20 percent is applied to the gain from appreciation. Net investment income rate of 3.8 percent provided for by the Affordable Healthcare Act is applied as well. Also may apply, State-tax, which may vary from state to state. Florida is a non-state-tax state.
Given all this, investors increasingly are looking at exchanges to move their equity from one property to another without having that equity diluted by the resulting tax payments.
The philosophy behind tax-deferred exchanges is that the equity an investor has in one property is still the same equity when transferred to another property, and the same investment cycle continues, only in a different yet similar asset.
In general it is only when the investor’s real estate equity changes form, for example into cash, that the investment cycle is broken. At that time, the government typically requires the investor to report the gain or loss recognized.
Other reasons generally stated for completing an exchange include the following:
- Correcting a geographical problem, such as a job transfer or business relocation.
- Correcting a cash flow problem, such as moving from a property with a break-even cash flow to a property with a positive cash flow.
- Correcting a lack of diversity problem, such as having all equity in one property.
- Correcting a management problem, such as going from properties with intense management (apartment properties) to properties with less management (net-leased industrial properties)
Such a disposition sometimes is called a tax-free exchange, or a 1031 exchange in reference to the applicable IRC Section 1031, because the gain reported in the sale is not recognized in the year of disposition and therefore no taxes are paid at that time. However, the gain postponed on the exchange will be reported at the taxable disposition of the replacement property acquired, unless the disposition of such replacement property is similarly exchanged in a Section 1031 like-kind transaction.
As stated earlier in the selling section, Currently the cost-recovery recapture rate of 25 percent is applied to all cost recovery taken during the holding period. The current capital gains rate of 20 percent is applied to the gain from appreciation. Net investment income rate of 3.8 percent provided for by the Affordable Healthcare Act is applied as well. Also may apply, State-tax, which may vary from state to state. Florida is a non-state-tax state.
Given all this, investors increasingly are looking at exchanges to move their equity from one property to another without having that equity diluted by the resulting tax payments.
The philosophy behind tax-deferred exchanges is that the equity an investor has in one property is still the same equity when transferred to another property, and the same investment cycle continues, only in a different yet similar asset.
In general it is only when the investor’s real estate equity changes form, for example into cash, that the investment cycle is broken. At that time, the government typically requires the investor to report the gain or loss recognized.
COMMERCIAL REAL ESTATE
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
