I had a question from a client I am working with who owns commercial property in Florida. He asked, "why do a 1031 exchange?"
It's simple. I replied that in an exchange you are moving 100 percent of your net equity, tax free. His response was that he felt the tax was merely deferred.
That's true. However, if done correctly, it truly is tax free. The capital gain is carried to the next property without being taxed. Further, capital gain taxes are really voluntary taxes when you really drill down into the meat of the matter.
Think about it . . . the gain is not taxed unless the owner volunteers, by selling the property! Instead of selling, many shrewd investors continue to exchange until they die -- or their LLCs continue to exchange after their death -- and the cumulative gains are forgiven because of stepped up basis rules.
Bottom line -- consult a GOOD tax attorney. IR 1031s are one of the most powerful ways under our tax code to build wealth. But there is another problem. 1031s are much misunderstood by attorneys, accountants and even real estate agents.
Do your homework. Find a CRE agent and tax attorney who understands tax-deferred exchanges.
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