Have you been feeling it? We sure have! Real estate transactions have been up considerably in the last few years and a large percentage of those have been 1031 Exchanges. When speaking with our clients, the high volume of exchanges can be attributed to a number of reasons.
Real estate remains strong and investors are starting to look for ways to change or build upon their portfolios. Properties that held as stable investments through the downturn are now showing significant appreciation and equity. Since multiple properties can be acquired through a single Tax Deferred Exchange, investors can diversify their real estate portfolio, thereby hedging the investment risk inherent in a single property. These replacement properties can offer greater income and long-term appreciation potential.
For some, it’s all about the taxes: In 2013 the Affordable Healthcare Act began imposing a 3.8% tax on certain investment income, including capital gains, for those with an Adjusted Gross Income exceeding $200,000 for single filers and $250,000 for married couples filing jointly. Additionally, the American Taxpayer Relief Act raised the top long-term capital gains rate from 15% to 20% for those with a taxable income of $400,000 for single individuals and $450,000 for married couples filing jointly. Both of these taxes, combined with the 25% Depreciation Recapture Tax and the state capital gains tax, cause a substantially greater amount of equity to be due to the Federal Government at tax time. With upwards of 1/3 the gain due in taxes, Investors utilize 1031 Exchanges to preserve their equity and grow their portfolio!
For others, Exchanging is an estate planning tool: Investors want the income and benefits of ownership while they are alive, but want the property and hard-earned equity to pass on to their heirs upon death. When a taxpayer dies, the estate receives a stepped up basis in the inherited property. As a result, all of the built in gain disappears upon the taxpayer’s death. This taxpayer could have exchanged multiple times during their lifetime, leaving their heirs with a sizable benefit that would have otherwise been greatly reduced if the taxpayer had sold the property outright, paid the taxes and just given the remaining cash to the future heirs.
These strategies are excellent tax saving opportunities for a 1031 Exchange, and for all those involved in the real estate transaction. We pride ourselves on not only being the industry leader in service and security, but we also strive to help our clients and their advisors keep current on tax issues pertaining to §1031 exchanges and applications for them. IPX1031® is your complete information resource. For more information about us, IRC Section 1031, or our complimentary monthly webinars, visit our website at http://www.ipx1031.com.
Patricia A. Flowers is Vice President with Investment Property Exchange Services, Inc.(IPX1031), the largest and most secure Qualified Intermediary in the country. In 2004, Patricia received one of the first industry-awarded Certified Exchange Specialist® (CES®) Designations. In her role she strategically guides investors and advisors through the process, structuring transactions to help investors preserve equity and save thousands in taxes.
Patricia’s involvement spans the legal, financial, brokerage, tax and real estate industries, where she has participated in thousands of Exchanges. She is a member of various associations, including CREW-Boston (Women in Commercial Real Estate) and the Federation of Exchange Accommodators (FEA). Patricia is a frequent lecturer on IRC §1031 Exchanges, an instructor for CLE, CPE and CE credit, and author of numerous articles including an ongoing column the New England Real Estate Journal.
She can be contacted at 617-423-1031 or firstname.lastname@example.org