When an investor decides to sell a commercial property, it is common to have a tax bill due because of the capital gains on the property. Learning about 1031 exchange capital gains can be a great method to reduce the tax burden and minimize the amount of money that is spent out-of-pocket.
Why is Capital Gains Calculated?
In many situations, investment properties build value over time. For example, an investor purchases the property and holds onto it for a while. The passing of time often results in an appreciation of the property value, giving the investor an opportunity to sell the property for a profit when the time is right.
When the sale goes through, capital gains are calculated based on the increase in the value of the property. For example, if the commercial building was purchased for $2.5 million and then sold ten years later for $3 million, then the increase in value is $500,000. The investor receives the difference in the price as profits, and the IRS deems it a taxable income.
As long as the money is tied up in the investment property, then capital gains do not need to be addressed. But these taxes are calculated when the sale goes through, and the asset is converted to cash.
1031 Exchange Capital Gains
Instead of paying a hefty tax bill when the property is sold, consider the benefits of using a 1031 exchange to avoid the immediate taxes. This strategy gives investors the opportunity to roll the equity into the purchase of a new property. Since the money is still tied up in property ownership, taxes aren’t due at the time of the transaction.
There are a few rules that need to be followed for a 1031 exchange capital gains. For example, the transactions need to happen together and need to be “like-kind.” Some of these exchanges happen simultaneously where the original property and the replacement property deals are closed on the same day. In many situations, the deals don’t happen simultaneously. Instead, the first property is sold. Then the money is held in escrow while another property is chosen and purchased.
Benefits of Deferred Taxes
Most people choose 1031 exchanges to reduce the amount that is paid in taxes. This deferment can continue indefinitely as long as the equity is rolled into another investment property when the original property is sold.
Other benefits of 1031 exchanges include the opportunity to diversify an investment portfolio, leverage the equity into properties with higher price tags, or protect business strategies and assets. This is why it is best to talk to an experienced financial team to determine the right investing strategy for your needs.
If you own a commercial building or you are looking for commercial investment opportunities, then it is a good idea to learn more about 1031 exchange capital gains. Our team at First National Realty Partners is here to help! Contact us for information about crowdfunding and partnership investing opportunities that are offered. We are working hard to provide the best services for our customers, with protecting investments and maximizing returns at the same time.