1031 Exchange- Make sense?

Question

Hey there,

I was wondering at what point a 1031 makes sense? I have a property which is the first I've held over a year. Someone told me to consider a 1031, but is it worth it if the profits are only 40K?

Jon Klaus · Answer

"Uncle Sam will get you later". Unless you successfully kick the tax can down the road until you kick the bucket and your estate deals with it at the stepped up basis.

Bill Exeter · Answer

$40,000 is generally worth it.  Most Qualified Intermediaries charge around $750.00 to $850.00 to process all of your legal documents.

The fee should cover preparation of review of your transaction to ensure compliance with the tax code, preparation of legal documents, assisting your with the process, including the 45 day identification period, and answering your questions as you go along.

The 1031 Exchange is a tax-deferred strategy.  It keeps your money working and growing for you, so it is generally a wise tax planning strategy.  And, if you continue to exchange until you die, you leave the property/assets to your heirs who will inherit the property at a stepped up cost basis.  The capital gain tax goes away.

Dave Toelkes · Answer

The long term capital gains tax rate (thru the end of 2012)  is not your tax bracket, but either 0% or 15% depending upon your tax bracket.  Unrecaptured depreciation is taxed at 25%

Dave Toelkes · Answer

Your assessment is basically correct.  However, a property you purchase to flip is not eligible to partipate in a 1031 exchange.  The replacement property in a 1031 exchange must be held for investment use, or for use in your business.

Flip property does not meet the "qualified use" requirement.

Instead, look at the tax impact of a sale.  Will the net profit on the sale be "earned" in the 15% tax bracket?  If so, then the capital gains tax due to appreciation is zero.

Do you have suspended loss carryovers that effectively nullify the capital gain.  If so, then a 1031 might not make sense.

As Bill Exeter already said, the reason to do an exchange is to put the money you would have paid to the IRS to work for you instead.  For me, the breakeven point is when the cost of the exchange is equal to or greater than the amount of taxes I would save by doing an exchange.

Andrew Gustafson · Answer

It depends upon your intentions. Do you intend to replace with another rental or investment property? The next step is to determine the the capital gains tax so you understand the tax due if you don't initiate a 1031 exchange. Talk with an accountant to run through the numbers.

Loc R. · Answer

Since you've held the property for more than one year, you would only be subject to long term capital gains, which would be your current tax bracket.

Depending on what you were going to do with that $40K, a 1031 may or may not be beneficial to you.

If you were going to buy more real estate, then yes a 1031 is probably going to be in your best interest, since you would be deferring taxes on your profit.

If you found what you thought was a better investment than real estate, then a 1031 is of no use to you at this time.

Account Closed · Answer

While you do not qualify for a 1031 exchange, you might qualify for a gain exclusion.

You must have owned in the home at least 2 years. (Ownership test)

You also must have lived in the home at least 2 years in the last 5 years. (Use test)

Account Closed · Answer

A home used for your personal residence does not qualify for 1031 tax treatment.

Tyler Carpenter · Answer

I just want to keep the most now at closing. Is it possible to not pay any capital gains on my scenario?

Bill Gulley · Answer

Are you going to consider that you pay future gains with cheaper dollars?

1031 Exchange- Make sense?

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