Wednesday, November 6, 2024 / by Chloe Rogahn
Understanding 1031 Exchange in Real Estate
Real estate investing is a powerful way to build wealth, especially when you understand the tools available to maximize your investment. One available tool is the 1031 Exchange, which can help investors defer taxes and reinvest their capital. Here’s how a 1031 Exchange could benefit a family looking to grow their portfolio:
The Johnson family purchased a duplex in 2014 for $200,000. Over the years, the property has appreciated significantly and is now worth $400,000. With their kids getting older and family goals evolving, the Johnsons are looking to reinvest in a different property, such as a small commercial building, to diversify their investment portfolio and set up a lasting financial foundation.
If the Johnsons were to sell the duplex outright, they would face capital gains taxes on the $200,000 profit (current property value minus purchase price). Assuming a combined federal and state capital gains rate of around 20%, they would owe around $40,000 in taxes, leaving them with $360,000 to reinvest. However, by utilizing a 1031 Exchange (also known as a Like-Kind Exchange), the Johnsons could defer the taxes and reinvest the full $400,000, maximizing their investment for their family's future.
What is a 1031 Exchange?
The 1031 Exchange, named after Section 1031 of the IRS Code, is a tax-planning tool for investors to exchange one property for another like-kind property of equal or greater value and defer taxes on capital gains. Like-kind property means it must be of the same nature or character, regardless of the condition or grade of the investment. The 1031 Exchange must be an investment property.
What Does NOT Qualify?
· Personal residence
· Developed lots
· Home flipping
· Property held for resale immediately after acquisition
· Second homes (depending upon the use)
How does a 1031 Exchange work?
· Select a QI (Qualified Intermediary)
· Must complete/close exchange within 180 days
· 45 days to identify eligible replacement properties
How Emmer Real Estate Can Help
Navigating a 1031 Exchange can feel complex, but the benefits are substantial for those looking to defer capital gains taxes and maximize reinvestment potential. Whether you're considering a 1031 Exchange or just want to explore ways to grow your real estate investments, Emmer Real Estate’s knowledgeable agents are here to help you every step of the way.
Let’s Talk!
Ready to explore how a 1031 Exchange could work for you? Contact us today to discuss your options. Your family’s financial future is our priority, and we’re excited to help you navigate this opportunity.
West Bend Office: 262-629-4747 | Green Lake Office: 920-294-4747 | emmerrealestate.com
Please note: Our agents cannot provide tax or legal advice. For more information on 1031 Exchanges, visit the IRS website or consult with a tax professional.
