1031 Exchange

      A powerful tool that can work to your financial advantage!

 Saving tax dollars while preserving equity!


When you sell your interest in an investment property and buy another, you may face a large capital gain and the prospect of paying federal taxes on it – and in some states, state taxes as well.  So your attorney, tax advisor, or real estate professional may suggest a tax-deferred exchange under Section 1031 of the Internal Revenue Code.


A 1031 Exchange allows you to dispose of investment properties and acquire “like-kind” properties while deferring federal capital gain taxes.  Most states with a capital gains tax offer a similar tax advantage, too.  Bottom line: a 1031 Exchange lets you reinvest sale proceeds that would otherwise be paid to the government as capital gains taxes.


Let’s assume that you acquired a property for $800,000 four years ago.  It has a current mortgage balance of $600,000 and has appreciated to $1,800,000.  During the period you owned the property you have taken depreciation deductions of $100,000.  Your long term capital gains tax would total $175,000 calculated as follows;

$100,000 appreciation gain x 15% = $150,000

$100,000 depreciation recapture x 25% = $25,000



Current Value     $1,800,000 $1,800,000
Mortgage payoff     (600,000) (600,000)
Tax on $1,000,000      
appreciation @ 15%   (150,000) deferred
Tax on $100,000 depreciation    
recapture @ 25%   (25,000) deferred
Available for reinvestment   $1,025,000 $1,200,000
Value of replacement property    
assuming 30% down   $3,416,667 $4,000,000








Any real or personal property can be exchanged, provided it’s held “for productive use in a trade or business”, or “for investment”, and is exchanged for property of like-kind that will also be held for one of these same purposes.


Most real property is considered “like-kind” to other real property.  A single-family rental unit, for example, may be used to acquire another like it, or to purchase a warehouse, retail center, or office building.  Like-kind limitations on personal property are more restrictive; assets must be classified similarly under government accounting classifications.




IDENTIFICATION PERIOD:  The property you’re acquiring must be identified within 45 days of the transfer of the first relinquished property.


EXCHANGE PERIOD:  The acquisition of your replacement property must be completed by the earlier of 180 days from transfer of the relinquished property or the due date of your tax return for the year in which the relinquished property was transferred.


TRADING UP:  To be fully tax-deferred, the property you’re acquiring must have value and equity equal to, or greater than, the relinquished property.




3-PROPERTY RULE:  Three properties, no matter what their value, or


200 PERCENT RULE:  Any number of properties, as long as their combined fair market value isn’t more than twice that of all relinquished property, or


95 PERCENT RULE:  Any number of properties, regardless of their combined fair market value, as long as you acquire 95 percent of their total value.



Disclaimer: All information deemed reliable but not guaranteed. All properties are subject to prior sale, change or withdrawal. Neither listing broker(s) or information provider(s) shall be responsible for any typographical errors, misinformation, misprints and shall be held totally harmless. Listing(s) information is provided for consumers personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing. Information on this site was last updated 12/11/2009. The listing information on this page last changed on 12/11/2009. The data relating to real estate for sale on this website comes in part from the Internet Data Exchange program of MFR MLS (last updated Fri 12/11/2009 12:00:00 AM EST). Real estate listings held by brokerage firms other than ERA Tom Grizzard Realtors may be marked with the Internet Data Exchange logo and detailed information about those properties will include the name of the listing broker(s) when required by the MLS. All rights reserved. --