YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

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PART II…

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The most used vehicle for “saving” income taxes when buying or selling Commercial Real estate is the Section 1031 Exchange.?The Section 1031 refers to the code section of the Internal Revenue Code.?The use of this section does not really eliminate income taxes, it defers income taxes on the gain of a piece of commercial real estate, a capital asset.?So, instead of paying capital gains taxes on the sale of a piece of commercial real estate you roll that gain forward to a new property and reduce the basis of the assets acquired by the amount of the deferred gain.?When you finally sell that property for the last time you will pay the tax on all of the gains you have had on that property.

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Let me make it easier for you.?You buy an apartment building on January 1, 2020, and you run it and get cash flow and appreciation and income tax benefits from owning it.?You hold onto it for say 3 years and then decide to sell it.?You bought it for $500,000 and three years later it’s worth $650,000.?There is a gain from the cost to the selling price of $150,000 but you really want to keep investing in apartment buildings, so you look for another apartment building to invest in.?

You have to find and identify the new building 45 days either before or after the sale of the original apartment building and you have to spend more than you sold the old apartment building for.?As long as you spend $1 more it will work.?You have 180 days from the time you sell the old apartment building to replace it in a Section 1031 Exchange.?The new apartment building cost you $725,000.?But the basis of the new building will be reduced by the deferred gain of $150,000 to $575,000.?That means a lot less depreciation can be taken on the new property and that’s BONUS DEPRECIATION that could save you lots and lots of income taxes down the road.

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Another VERY IMPORTANT point is that when the first apartment building is sold you will be getting cash.?BUT YOU CANNOT TOUCH THAT MONEY, SEE THAT MONEY, SMELL THAT MONEY, OR DO ANYTHING WITH THAT MONEY.?That money goes to a facilitator and is held until a second apartment building is found and then it goes directly from the facilitator to the escrow of the new building.?THERE ARE NO EXCEPTIONS!!!

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Many years ago, I had a situation concerning a Section 1031 Exchange and we will get into that tomorrow.