The Math Of The 1031 Real Estate Exchange
The 1031 real estate exchange program was designed by the IRS to make it easier for the consumer and businessperson to purchase property while selling owned property. The 1031 real estate exchange law allows for a seller to sell land or other useful property without paying taxes on it, provided a replacement property is purchased and no profits are taken in by the seller. The 1031 real estate exchange allows for a person or business to place a larger down payment or purchase the properties outright. This larger down payment or larger sum for outright payments means a higher property value can be obtained.
The 1031 real estate exchange law is an IRS law that makes it so that property sold by one company is not taxed on the amount of the sale, provided a replacement property is purchased in the allotted amount of time. This is also to mean that the company cannot post a gain of profits, and that both properties of the exchange were of like kind and value. While to replacement property can be more valuable that then original property, it cannot be the other way around to qualify as 1031 real estate exchange.
The lack of taxes from the 1031 real estate exchange on the sale of the initial property can be very beneficial for the company in many ways. This deferment of the taxes means that all of the money from the sale can be used to purchase more property. This excess money also allows the company to make a higher return off it by investing it in better replacement real estate. This can be clearly seen in the following example.
A company wishes to relocate to another location within the United State of America. This company has a buyer for the relinquished property and does not qualify for a 1031 real estate exchange because there is no immediate seller. At the end of the closing, the company has to pay the taxes on the sale. This tax is usually about 35%. This is to mean that if the initial property sold for $100,000, the taxes taken out would be $35,000. This would leave $65,000 for a down payment or real estate purchase. The $65,000 would result in a $260,000 mortgage provided the down payment was 25% of the loan. Now, provided the property value to loan ratio was 75%. This would mean that the value of the real estate us 25% greater than the value of the loan. This would mean that a $325,000 parcel has been purchased.
This same company, with all of the same circumstances minus this time they have a seller too, qualifying for the 1031 real estate exchange. This means that once the original sale was made, all of the $100,000 could be reinvested. This makes the loan value $400,000 and the property value $500,000. The difference is amazing. The same holds true for building that are purchased outright. It is little wonder that so many companies use this law.
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