Need Information on 1031 Exchanges?
Suppose you're a real estate investor who needs to sell a property you've held for a long time or for a substantial profit. In that case, a 1031 exchange is an excellent way to minimize or even completely eliminate the tax obligation from the sale. To make the most of this strategy, however, you'll need the right help. In New York, BCP Real Estate Group is the name to trust. We understand the unique needs of real estate investors, and our team can provide you with the guidance you need to make the most of your 1031 exchange.
What is a 1031 Exchange?
When you sell an investment property, two types of taxes apply. The capital gains tax applies when you sell an asset for more than you paid for it. If you held the property for a year or longer, long-term capital gains taxes apply – these have more favorable tax rates. If you kept it for less than a year, your regular income tax rate applies.
In this situation, you're also subject to the depreciation recapture tax, which is designed to offset the depreciation deductions that you claimed each year that you held the property in question. It is based on a period of 27.5 years; to calculate your yearly deduction, divide your basis in the property by 27.5.
Here's an example of how much you could owe in taxes for selling an investment property. Let's say you bought a property 10 years ago for $200,000 and just sold it for $300,000. Over that period, you claimed a depreciation deduction of $7,272 per year; your full deduction totaled $72,727. At the time of sale, that amount is taxed at your ordinary income tax rate. If you're in the 24% tax bracket, you'll owe $17,454 in depreciation recapture taxes. Your $100,000 profit will be taxed at the long-term capital gains tax rate, 15%, so that will tack on an additional $15,000.
All told, you'll owe $32,454 in taxes for selling your investment property; with a 1031 exchange, you can defer the amount you owe over the long term or even indefinitely.
Reducing Your Tax Liability with a 1031 Exchange
So, how does a 1031 exchange help reduce your tax liability? Simply put, it allows you to defer the tax liability from a sale by using the proceeds to acquire a new investment property. The theory is that if you don't actually "cash out," there's nothing to tax. Taxes can be deferred indefinitely with this strategy as long as you keep buying new properties upon selling old ones.
To employ this strategy, the acquired property must have the "same nature or character" as the one you sold. This means that the replacement property must be held for use as an investment property.
You can altogether avoid taxes by first ensuring that the replacement property's purchase price is of equal or greater value than the sale price of the property that you sell. Next, if the original property had a mortgage, you must use the same amount of debt – or more – to finance the replacement property.
Time is of the Essence
One of the most stressful aspects of using a 1031 exchange is that you are subject to strict time limits. All told, you have 180 days from the sale of the original property to close on the purchase of the replacement property. However, the more pressing issue is the 45-day time limit that you have after selling the property to identify potential replacement properties. You are allowed to identify up to three like-kind properties or as many as you want; the combined value can't exceed 200% of the original property's sale price. You must then give your list of replacement properties to your exchange facilitator.
Given that you only have 45 days to identify replacement properties, the process can get pretty stressful. That's especially true in a competitive and fast-paced real estate market like New York's. With that in mind, it pays to have access to timely and accurate resources; to that end, you can't go wrong with BCP Real Estate Group.
BCP Real Estate Group understands the unique needs of property investors who want to take advantage of the tax benefits of 1031 exchanges. We know that you have a limited time to find replacement properties, and we offer an array of resources to help you do so as quickly and efficiently as possible. There's our huge online database of searchable NY real estate listings, which lets you identify promising options in a flash. Our website includes a wealth of real estate information that's pertinent to busy investors. Finally, we can assist you with the 1031 exchange process, so contact us today for more details.