The benefits of 1031 are tremendous in growing wealth by owning investment property.
Taxpayers can defer capital gains including depreciation recapture, the new net investment income tax, New York State & New York City taxes.
For Example: Let's say that a New York City resident married couple filing jointly sells an investment property in NYC for $1.2 Million (after closing costs) that they purchased for $600k with $300k of of the building being depreciated over time.
The capital gain would be $900k with a breakout of $300k being taxed at a 25% depreciate recapture rate and $600k being taxed at a 20% rate. It would also trigger a 3.8% net investment income tax and 12.7% NYS/NYC tax.
Under a Section 1031 exchange the couple could defer the capital gains and roll the proceeds into another like-kind investment property.
However, here are some of the strict rules:
A.) Selling the property with a Cooperation Clause in the sales agreement.
B.) Enter into the 1031 exchange agreement with the Qualified Intermediary named as principal in the sale of the relinquished property and the subsequent purchase of the replacement property.
C.) Must provide written identification of the address of the identified replacement property within 45 days and closed with 180 days.
D.) Prepare and File Form 8824 with the IRS with tax return and corresponding documents with state and local agencies.
Here's a Sample Summary of a Sale:
End Result: You'll quickly see that the couple could take the $1.2 worth of proceeds and put it down as payment to a larger investment property increasing wealth and saving money.
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Disclaimer: The above fictitious sample was created to help illustrate the advantages of a Internal Revenue Code Section 1031 Exchange. The tax related information contained herein should not be construed as tax or legal advice specific to your situation and should not be relied upon in in making any business, legal or tax related decisions. A full evaluation of the benefits and risks associated with a transaction or tax return position requires tax and/or legal advice with all facts taken as a whole. If you would like to learn more, contact us to receive a personalized analysis on your situation. Always seek guidance of a licensed CPA or Attorney.
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