Exchange Your Way To Profits

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Jim, Ricki and Samantha Soletti ABR, GRI, e-PRO, Broker
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(512) 263-7333
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(512) 263-2910
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(512) 891-9777
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(512) 296-4013 xJim
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(512) 296-3998 xRicki
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(512) 293-0276 xSam

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Eanes Properties
PO Box 150513
Austin, TX 78715

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Exchange Your Way To Profits

What is a 1031 tax free exchange?

If you are not familiar with Section 1031 of the Internal Revenue code, you should be. Section 1031 offers a rare opportunity. A true win-win situation for Seller and Buyer. An opportunity for a Seller to, in some instances, completely defer all tax due on the gain from the sale and an opportunity for the Buyer to purchase property which might not otherwise be on the market.

For example, John owns an eight unit apartment building which he purchased in 1990 for $100,000. In the past ten years he has taken $15,000 in depreciation expenses, leaving him with a tax basis of $85,000 ($100,000 - $15,000). He has a mortgage balance of $75,000. John now has the opportunity to sell the building for $200,000. He is interested in reinvesting the proceeds of the sale in other income producting real estate.

Depending on John's overall status and assuming sales expenses of 10%, he can expect to pay over $30,000 in taxes from the sale of his apartment building, netting approximately $75,000 to reinvest after paying his mortgage.

By using a 1031 tax free exchange, John may be able to completely defer payment of tax on the gain leaving $105,000 for reinvestment. Because the mechanics of deferred exchanges are now so easy, exchanges present a very viable marketing opportunity.

If John can defer paying $30,000 in taxes he has $105,000 to reinvest rather than $75,000. Aswsuming a loan to value ratio of 75%, John can purchase a $420,000 replacement property rather than a $300,000 property. John's investment horizon is raised by $120,000.

The real beauty of the simplified exchange is that all parties (with the exception of the IRS) win. There is no increased cost or hassle to the Buyer. The Seller pays a nominal fee to the third party who acts as an intermediary and the Seller defers his tax. One of the rules is that the Seller must never touch the proceeds. All proceeds go to the third party who hold the funds until the Seller identifies the like property he wants to invest in. The Seller has 45 from closing to identify the property he is buying and 180 days to close.

For more information on 1031 tax free exchanges or to ask any questions, contact Eanes Properties. If they can not answer your question, they will put you in touch with someone who can.

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