Financial Resource

If you have some money then you may have considered trying to make your fortune with stocks, bonds, and maybe even real estate.  The concept is to buy cheap and sell dear, since profit is the name of the game.  Before getting into it though, there is something you need to know.  These kinds of assets are taxable if a capital gain is made, and the associated tax is called a capital gains tax.

Capital gain means a net profit gained from selling non-inventory assets like real estate, stocks, and bonds.  If you bought any of these for price X and sell them for price Y, where Y is a positive value greater than X, then you have made a capital gain.  In the United States of America, this capital gain is subject to taxes, ranging from 5 to 15% based on your financial standing.  Put simply, you won’t get the whole 100% of your profit, since some of it will go towards paying taxes.

Taxes are all well and good, but sometimes one may feel that it is unfair.  After all, it was you who took all that risk in buying those assets and making them grow.  There is a solution with which you can get that whole 100% of your grown investments, if you were planning to use that amount to invest in something else.  This “solution” is called a 1031 exchange.

A 1031 exchange is called such because it is an exchange of assets as governed by the United States’ Internal Revenue Code section 1031.  Under this, like-kind similar-value assets may be exchanged with no capital gains tax levied against them.  Due to the definition of terms, a capital gain is not made unless an explicit sale is made.  Because assets are not sold and bought under a 1031 exchange, then technically no capital gain is made and thus no capital gains taxes apply.

As an example, take the following situation.  A man owns a house that he is currently renting out.  The house is in the suburbs, so it is not too pricey.  It is however, quite large and very well kept, so it has gained value under the ownership of that man.  One day, he takes a drive around the city and spots a building that would be suitable for turning into a boarding house for students.  It is not very large, but it is close to the good schools.  He asks for an appraisal and finds that it is valued at roughly the same amount as the house that he is renting out, if there are no losses due to tax.  He files for a 1031 exchange and trades his old property for the new one, deferring his capital gains tax.

Making the most of your investment usually means reinvesting in something else and letting it grow even more, while losing as little as possible. 1031 exchanges can make that happen.  If you are interested, you should seek the advice of a qualified tax practitioner, so you can get it clean and clear.

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