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1031 TAX DEFERRED EXCHANGE

The benefits of IRC Section 1031 exchanges can be substantial. Investors are often able to defer thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid 1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long-term, interest-free loan from the IRS.

Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.

Consider the Following:

  • An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.

  • Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.

  • If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.

As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term like-kind - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked.

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Questions about 1031 Tax Deferred Exchanges? Contact Andrew J. Treuting, managing attorney of  our commercial services department and resident expert on 1031 Tax Deferred Exchanges.

504.525.1491
atreuting@titlestream.com
  • What is an adjudicated property?
    An adjudicated property is a property which tax sale title has been acquired by a political subdivision pursuant to R.S. 47:2196. The original owner failed to pay taxes, the government was unable to sell the tax bill as a tax certificate at the annual tax sale, and the owner has subsequently failed to pay taxes the following five years.
  • I have heard these properties do not have clear title, is that true?
    No. Prior to closing, we work in conjunction with CivicSource to alleviate the title issues that arise in any closing such as liens, mortgages, judgments and past taxes due on the property. The previous owners have been provided notice that their taxes are delinquent and failed to capitalize on their final opportunity to redeem their past due taxes. By the time they are purchased, the legal requirements to sell adjudicated property in Louisiana have been met and you can feel confident the property you purchased was transferred legally.
  • Can the previous owners come back and cancel my purchase?
    No. All tax sale parties were notified pursuant to La. R.S. 47:2206 or 2236 that their rights to the property were terminated by a failure to redeem the taxes owed. This notice, referred to as post sale notice in Louisiana law, was confirmed as constitutionally sufficient by the Louisiana Supreme Court in Central Properties v. Fairway Garden Homes, LLC. Previous owners of adjudicated properties retain the same rights as any other previous owner of property.
  • How much does the tax sale endorsement cost?
    The title insurance premium is calculated just like any other title policy (filed rates with the LA department of insurance). The additional cost comes from two endorsements that affirmatively insure over the tax sale issue. The first is the tax sale endorsement. The premiums are calculated as follows: Up to $25,000 - $1,000 $25,001 to $50,000 - $1,000 plus $15 per thousand over $25,000 $50,001 to $100,000 - $1,375 plus $5 per thousand over $50,000 $100,001 to $200,000 - $1,625 plus $3.50 per thousand over $100,000 $200,000 + 1% of the liability The second is the ALTA 34 identified risk endorsement that costs 25% of the basic title insurance premium.
  • What does the sale of an adjudicated property confer to the purchaser?
    An adjudicated property is a property which tax sale title has been acquired by a political subdivision pursuant to R.S. 47:2196. The original owner failed to pay taxes, the government was unable to sell the tax bill as a tax certificate at the annual tax sale, and the owner has subsequently failed to pay taxes the following five years.
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