Other reason to do a 1031 tax free exchange is that the IRS calculates a 3% depreciation amount for every year an investment property is owned. This amount is “re-captured” at the time of sale by being added back into the property’s cost basis and taxed at the taxpayer’s marginal tax rate. Taking advantage of selling using a 1031 tax free exchange will also allow for the taxation of IRS depreciation to be rolled into the replacement property. Investors.
Under IRS tax code 1031 a tax fee exchange is treated as an exchange and not as a sale. This is an important distinction since selling is always treated as a “taxable event”.
It is this unique distinction that allows for any profits also known as capital gains to be transferred into the replacement property. It is VERY important that each requirement of tax code 1031 be followed very carefully as the devil is in the details, since if all requirements are not followed the exchange can be rejected and the “sale” will then be subject to capital gains taxes in the year of sale.
Our Office Hours