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Beth A. Botti, CFP®, ChFC, CLU, CDFA™
Financial Consultant
California Insurance License #0G24537
612 Wheelers Farms Road, Milford, CT 06460
Phone: 203-877-6556 Ext. 169
Fax: 203-301-0736
Email: beth.botti@equitable.com
November/December 2024
Swap Real Estate to Defer Capital Gains Taxes
Mention a Section 1031 exchange, and many investors in real estate immediately think, "minimize capital gains taxes." But a 1031 exchange may provide other advantages.
1031 Exchange Tax Deferral
In a 1031 exchange, you sell a property held for business or investment purposes and swap it for a new one you purchase for the same purpose, allowing you to defer capital gains tax on the sale. The exchange may also be used to defer another tax—depreciation recapture. When you sell property, the depreciation you've claimed on the property is generally taxed at 25%. Selling the property as part of a 1031 exchange also lets you defer this tax. Since the corporate tax rate tends to exceed the capital gains tax rate, this can further support the benefits of your exchange.Of course, there are requirements. Proceeds from the sale must be held in escrow by a third party and then used to buy the new property. You can't receive the proceeds, even temporarily. The properties being exchanged must be considered like-kind by the IRS for your capital gains taxes to be deferred. Taxes are due when the property is sold. But if used correctly, there is no limit on how frequently you can exercise 1031 exchanges. So, in theory, the exchange can be used to defer taxes for your lifetime, which leads to another advantage.
An Estate Strategy
The ultimate tax deferral occurs with the investor's death. At that time the investment property receives a step-up in cost basis so your heirs don't inherit the previously deferred tax liabilities.An Investment Tool
A 1031 exchange can also be used as an investment tool. You might use it to increase your real estate portfolio without investing additional money. The additional equity created by the capital gain in the original property is redeployed instead of you coming up with additional capital for a subsequent purchase. This offers the potential to increase wealth creation over time.Also, consider exchanging one large real estate investment for several smaller ones. This strategy can broaden your property portfolio by type and location and help you respond to changing real property markets, as your needs may require.
A 1031 exchange could potentially build wealth. However, understanding the complex rules requires even the savviest investor to enlist professional help.
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Duly registered and licensed financial professionals offer securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA,SIPC (Equitable Financial Advisors in MI & TN), offer investment advisory products and services through Equitable Advisors, LLC, an SEC-registered investment advisor, and offer annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of Utah, LLC in UT; Equitable Network of Puerto Rico, Inc.). Equal Opportunity Employer - M/F/D/V. Equitable Advisors and its associates and affiliates do not provide tax, accounting, or legal advice or services. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. Your connection to this website does not necessarily indicate that the sender is able to transact business in your state. The information in this website is not investment or securities advice and does not constitute an offer. For more information about Equitable Advisors, LLC you may visit https://equitable.com/crs to review the firm's Relationship Summary for Retail Investors and General Conflicts of Interest Disclosure.
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CFP®, and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board's initial and ongoing certification requirements.
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