When it comes to investments and taking up business opportunities, often having as much money in the pot as possible is essential for you to secure that next step up the ladder – be this securing larger premises, diversifying into a new area or simply upscaling your current ventures. If selling your current business or investment property is part of the plan, you will want to ensure that not only can you get the best price for your asset, but that you don’t get stung for too many taxes and fees. Fortunately, there is a tax incentive that can help you postpone one of the biggest costs associated with selling a business or investment property – capital gains tax. This incentive is known as a 1031 exchange.
What is a 1031 exchange?
A 1031 exchange, also sometimes referred to as a like-kind exchange, is a swap of one business or investment asset for another. It takes its name from the IRS section 1031 which allows an investor to sell a property, land or similar asset into a like-kind investment while deferring all capital gains tax.
Unsurprisingly it isn’t quite as easy as it sounds and there are a variety of rules and regulations surrounding performing a 1031 exchange, not least that you must have your exchange facilitated by a qualified intermediary. However, done properly, it is possible to defer capital gains tax indefinitely. When you consider that the amount of capital gains tax that you may be liable for could be up to 20% of the profit made from your property, you can quickly see that a 1031 exchange could save you thousands of dollars – money which you can put towards your next investment.
For example, if you make $100,000 dollars net profit on the sale of your current property or land and you are taxed at 20%, you could lose $20,000 in capital gains tax and only receive $80,000 clear towards your next investment. Obviously the more profit you make, the more you can defer and the more equity you will have to put towards your replacement property.
Who is a typical 1031 exchange client?
Unfortunately, not everyone can benefit from a 1031 exchange. Typical 1031 exchange clients tend to fall into one of several categories.
Owners Of Businesses:
This includes individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies and trusts.
These are individuals who own property or land as part of a private investment portfolio but without any business or corporation attached to the ownership. A 1031 exchange can also sometimes refer to personal property that has been bought as an investment, such as a painting or sculpture.
Individuals who own property or land that they lease to another individual, group, business, charity or trust.
If you are unsure if you are a suitable candidate for a 1031 exchange, our dedicated exchange facilitators will be happy to speak to you about your proposed exchange and help you determine whether or not you qualify for this still fairly unknown tax incentive. Please contact our Sell Tax Free office today.