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Baltimore
City -
Canton
Fells Point
Federal Hill
Baltimore
City N. -
Roland Park
Guilford
Homeland
Baltimore County -
Ruxton
Cockeysville
Lutherville
Hunt Valley
Greenspring Valley |
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Thanks to IRC #1031,
a properly structured exchange allows an investor
to sell a property, to reinvest the proceeds in
a new property and to defer all capital gain taxes.
IRC #1031 (a)(1) states:
"No gain
or loss shall be recognized on the exchange of
property held for productive use in a trade or
business or for investment, if such property is
exchanged solely for property of like-kind which
is to be held either for productive use in a trade
or business or for investment."
To understand the powerful protection an exchange
offers,
consider the following example:
An investor has a $200,000 capital gain
and incurs a tax liability of approximately
$50,000 in combined taxes (depreciation
recapture, federal and state capital gain
taxes) when the property is sold.
Only $130,000 remains to reinvest in another
property.
Assuming a 25% down payment and a 75%
loan-to-value ratio, the seller would
only be able to purchase a $520,000 new
property.
If the same investor chose to exchange,
however, he or she would be able to reinvest
the entire $200,000 of equity in the purchase
of $800,000 in real estate, assuming the
same down payment and loan-to-value ratios.
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As the above example demonstrates, exchanges protect
investors from capital gain taxes as well as facilitating
significant portfolio growth and increased return
on investment. In order to access the full potential
of these benefits, it is crucial to have a comprehensive
knowledge of the exchange process and the IRC.
For instance, an accurate understanding of the
key term "like-kind" - often mistakenly
thought to mean the same exact types of property
- can reveal possibilities that might have been
dismissed or overlooked. API is your resource
to obtain accurate and thorough information about
the entire exchange process.
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