Selling Your Property - The 1031 Exchange

By Jerry Stewart

In my report to you two weeks ago we talked about the sale of real property. Specifically, the sale of your personal residence and some of the misinformation you may have encountered about the sale of your residence. Hopefully, any confusion you may have had in your mind about that sale is now a little clearer. By the way, if you ever need or want to readdress any of my previous reports just go to Dairyline.com and follow the prompts.

Now, for the last three months, with more frequency than I can ever remember, more and more of my clients are asking me about this tax maneuver which comes to us with many titles. Some call it the "like kind exchange". You may have heard it called a "tax free exchange", but today I’m going to use it’s more formal title – the "1031 exchange". And if you have any plans, present or future, to sell any properties, listen closely.

When you sell real property which is not your personal residence, and you have owned for at least one year, the gain on that property is not taxed like ordinary income, wages, interest earned, and like that. This real property is taxed differently in a tax category called capital gains tax. Now the great thing about the capital gains tax (I can’t believe I just used the words great and tax in the same sentence), but the great thing about the capital gains tax is that it is taxed at a rate much lower than ordinary income tax.

For example, when your ordinary income tax rate is 15%, the capital gains rate in that same income bracket is just 5%. That rate is unbelievable. And if you find yourself in the 25% tax bracket, the capital gains rate for that same bracket is 15%. But from here it gets even better. From that point on, no matter how much higher your taxable income goes, no matter how high your ordinary income bracket goes, the maximum tax rate for capital gains stays at 15%. So, clearly, as taxes go, any income which can be categorized as capital gains income will help you to save a lot of money.

But just what about this idea of the 1031 exchange? Well first and foremost, know this – the 1031 exchange is not a tax-free event. Better said, it’s a tax deferring event. Simply put, it’s a way to sell your real property today, use those sale proceeds to buy a qualifying replacement property, and defer paying any taxes now. But, when it comes to the 1031 exchange, it’s anything but simple. So, I’m going to pick up here next week with more about this topic.

I’m Jerry Stewart saying "See you next week". Until then, don’t forget – It’s Your Money!