Phil Castle, The Business Times
Federal tax code offers advantages to people who sell one property and then soon buy another property — chief among them the ability to defer taxes on capital gains.
With capital gains tax rates increasing this year, 1031 exchanges likely will become an even more popular strategy, said Tracey Wilson, vice president of business development for Investment Property Exchange Services.
Wilson will lead a series of free classes on 1031 exchanges and other economic topics scheduled for April 17 and 18 in Grand Junction. Wilson also is scheduled to speak at a meeting of the Real Estate Investors Network on April 17.
Heritage Title Co. in Grand Junction will present the classes and also offer information about available title resources.
Annette Miller, senior vice president of Heritage Title, said Wilson is not only knowledgeable about 1030 exchanges, but also presents information in a clear and entertaining fashion. “I get so excited about these, classes, I really do,” Miller said
Wilson, a certified exchange specialist, works for what’s called a qualified intermediary that handles 1031 exchanges. In fact, IPX has become one of the largest intermediaries in the United States and the only remaining intermediary with offices nationwide, Wilson said.
Named for a section of the federal tax code, 1031 exchanges allow the owners of real estate to defer capital gains taxes on the sale of one property when they purchase another property within a set time. In effect, the transaction is treated as an exchange rather than a sale and subsequent purchase.
Proceeds from the sale must be held by a qualified intermediary and used for the purchase of another property, Wilson said. Up to three replacement properties must be identified within 45 days of the date the relinquished property is sold. The purchase of a replacement property must close within 180 days, he added.
By going through a 1031 exchange, people can defer tax on gains they realized in selling the property. The savings can be substantial, Wilson said, especially since federal capital gains tax rates have increased for taxpayers in some brackets between 3.8 percent and 8.8 percent for 2013 up to a maximum rate of 23.8 percent.
There can be additional savings because depreciation on real estate is recaptured and taxed when that real estate is sold, Wilson said. The recaptured depreciation is 25 percent of the depreciation used to determine adjusted basis.
Even if a property sells for less than its purchase price, the sale amount still could exceed what the IRS considers the adjusted basis — or net cost— and create tax liability, he added.
Adding state tax to the equation, and the blended tax rate on real estate gains can total 35 percent to 40 percent, Wilson said.
But the savings realized from deferring taxes can be used to buy the replacement property, preserving equity or leveraging the money to purchase a larger or more expensive property, he said.
Finally, 1031 exchanges allow property owners to carry over the basis of the relinquished property onto the replacement property, Wilson said.
In addition to 1031 exchanges, Wilson said he covers other topics in his classes, including his forecast for 2013 and the surtax imposed as part of federal health care reform.
A topic he calls “barstool” economics includes an illustration measuring the growing federal deficit by shots of whiskey.
The combinations offer both information and entertainment, he said. “It makes it a lot more fun for people coming to my classes.”