Pulling Out Taxfree Booty From Your 1031 Exchange

Dated: 05/25/2015

Views: 564

Can I pull out some tax-free booty from my 1031 Exchange?

Section 1031 of the internal revenue code can be married to section 121 allowing an exchangor to take up to $250,000, $500,000 for married couples, in tax-free profits off the top of a 1031 exchange sale if the exchangor has served 187 days a year (more than half the year) for 2 of the preceding 5 years in the property, claiming it has his primary residence.

Example: Investor purchases a triplex for $600,000, gets married, and watches his investment more than triple over the years. The investor is preparing for retirement and decides to exchange the triplex into a NNN Leased Investment to increase cash flow, depreciation write-offs, and ease of management. Investor moves into one of the units and keeps the other two units rented out. After two years, the investor sells the property for $2,100,000. Normally the sale would come with at least a $375,000 tax bite ($1,500,000 X 25% Capital Gains) and closer to $500,000 if re-captured depreciation were factored in; however the investor purchases a $1,400,000 NNN Leased Investment via a 1031 exchange and pockets the other $700,000 tax free under the homeowner's deduction section 121 (assuming no re-capture). Had the investor just pulled all the way out, and not used protection from section 1031 and 121 of the internal revenue chode, he would have had to write a check to the IRS for close to $500,000. That's some expensive booty.

About the author: Richard L McKinney Realtor, Local Real Estate Expert & Nice Guy

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Richard L. McKinney P.A.

Atlantic Shores Realty Executives

Selling the Treasure Coast - Port St Lucie, Fort Pierce, Stuart, Jensen Beach, Palm City and Hutchinson Island --- Homes, Condos, Townhomes & Land.

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Richard McKinney

I have been selling real estate in South Florida since 1998 with a specialization in homes, town homes and condos in St Lucie and Martin Counties. My service areas include the cities of Port Saint Luc....

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