Under Section 1031 of the Internal Revenue Code, a properly structured exchange allows an investor to sell a property and reinvest the proceeds in a new property, of equal or greater value, and to defer all capital gain taxes. The actual text from IRC 1031 states,

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

1031 Exchanges were designed to protect investors from having to pay significant capital gain taxes. As an investor, it is important to understand this tax code. 4Sight Investment Group has partnered with some of the leading 1031 Exchange specialists to help you understand how this entire process works.

Here's a quick example that helps you understand the benefits a 1031 Exchange offers:

• An investor sold an existing cash flow property for $750,000 and the outstanding loan on the property was $500,000. Under this scenario, the investor is subject to $250,000 of capital gains. When realizing this gain, the investor is subject to approximately $75,000 in capital gain taxes (give or take). This includes federal, state and depreciation recapture. That leaves the investor with only $175,000 to invest.
• Traditionally, this investor purchases properties with 20% down and 80% LTV from private or conventional lending sources. Knowing he only has $175k to invest, and knowing he will only place 20% down on a property, that means this investor cannot purchase a property greater than $875,000.
• However, if the investor used a 1031 exchange at the original sale, the investor can re-invest the entire $250,000 gain which now allows him to purchase a bigger property. Following his traditional investing patterns, a 20% down payment now allows this investor to purchase a property up to $1,250,000.

There lies the significant benefit of a 1031 Exchange. 4Sight's 1031 Exchange partners will work with you on how to properly structure these exchanges and the requirements that need to be met in order to fully transfer all capital gain taxes. Give us a call and we will quickly identify if a 1031 Exchange is right for you. As an investor, it is important you familiarize yourself with this process and have it become an underlying rule and principle to real estate investing.

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