Andy Gustafson

Capital Gains Tax Deferral

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Deploying a capital gains tax deferral strategy merits additional attention given the pending federal changes effective January 1, 2013. Taxes on ordinary income will increase from 35 percent to 43.4 percent for earners in the highest bracket.  The long-term capital gain rate will increase from 15 percent to 23.8 percent including the new 3.8 percent “health care tax” on interest, dividends and other passive income earned by individuals with income more than $200,000 per year, or $250,000 for married taxpayers. The estate and gift tax will also change. The current estate and gift tax exclusion is $5 million with any excess subject to a federal estate tax of 35 percent. Effective in 2013, the exclusion returns to $1 million with the maximum estate and gift tax increasing to 55 percent.

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What is a 1031 Exchange

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Triple Net Lease 1031 Replacement PropertyA 1031 exchange is found in the Internal Revenue Code Section 1.1031. The tax deferral allows federal taxpayers, both U.S. and foreign, to postpone paying federal and state capital gains and recaptured depreciation taxes when selling and replacing property held in a trade, business or for investment. A 1031 exchange is an indefinite, interest free loan that can amount to more than forty percent of the sales price. The tax is ultimately due when the replacement property is sold unless another 1031 exchange is initiated.

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Improvements to be Constructed in a 1031 Exchange

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When a taxpayer plans to include improvements to be constructed in a 1031 exchange, the role of the Qualified Intermediary (QI) is extremely important. The Exchange Accommodator Titleholder (EAT) will hold the title to the property while the QI holds the cash included in the transaction while improvements are being made. The QI will then pay the vendors and contractors, and prior to the 180th calendar day post-closing on the old or new property, the EAT will convey title to the taxpayer.

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1031 Real Estate Exchange Rules

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1031 real estate exchange rules define how to go about deferring federal and state capital gains and recaptured depreciation taxes when selling and replacing a real property investment. A 1031 exchange, or Internal Revenue Code (IRC) Section 1.1031, allows any entity, both U.S. residents and foreign non-residents, to defer or postpone the payment given certain 1031 real estate exchange rules are strictly followed. The first step is to be aware that the taxes can be deferred indefinitely or until the replacement property is sold. Taxes, both federal and state, along with a twenty-five percent recaptured depreciation tax, can amount to upwards of 40 percent of the property’s sales price. If you could be given up to 40 percent of the real estate sales price interest free to use towards acquiring replacement property, wouldn’t you ask what the 1031 real estate exchange rules and requirements are?

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Advance Auto Parts in Ridgeland, South Carolina 1031 Eligible

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Advance Auto Parts Triple Net Lease 1031 EligibleA 6,800 square foot Advance Auto Parts in Ridgeland, South Carolina is a 1031 eligible investment replacement property featuring new construction to be completed in October, 2012 and a 15 year net lease. Price is $1,317,057 with a capitalization rate of 7.0%.
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