1031 Exchanges

How do I know if I have a gain on the property that I am thinking about selling?
It would seem that this question could be simply answered by responding: “If I sell if for more than I paid for it.”

However, there are other factors that enter into this equation. What you really want to determine is your “basis” in the investment property. A couple of the factors that might effect the calculation of your basis in the property are capital improvements and depreciation taken on the property. There are many others, but let’s look at an example that includes these two factors.

Mr. and Mrs. Los Angeles Investors bought a rental property that they purchased 3 years ago for $500,000.00. They made capital improvements totaling $100,000.00. In addition, they took depreciation totaling $50,000.00 on their tax returns to date. They are contemplating selling their home for $1,000,000.00.

First, let’s calculate their basis as follows:
500,000 Purchase Price
100,000 Capital Improvements
600,000 Total Capital Expenditures
50,000 Less Accumulated Depreciation
550,000 Current Basis in Investment Property

$550,000.00 is the basis that would be used to calculate the gain that could potentially be deferred through the use of a properly executed 1031 exchange. Therefore, if the investment property sold for $1,000,000.00 (net of commissions and other closing costs), then the potential taxable gain that would be available for deferral through a 1031 exchange would be $450,000.

There are thousands of IRS rules that cover 1031 exchanges. However, more than 90% of straight 1031 exchanges are covered by the above 6 rules. Keystone Group Properties is experienced at 1031 exchanges and are happy to assist you in this manner. We also recommend that you consult your tax professional in regards to buying and selling real estate, especially when dealing with 1031 exchange.