1031 Tax Deferred Exchange

Estimating Your Tax Burden

Recently, the penalty on the sale of land went up along with other capital gains. Using a 1031 tax deferred exchange can help to ease the tax shock. If one were to sell land now, they would be hit with a 23.8% federal rate on the gain. Illinois will help themselves to another 5% of your earnings on top of that. Figuring the actual tax burden is difficult since some of your gain may be subject to normal income tax rates. So taxes on the first $200,000 – $450,000 of gain could be less than 28%, so this complicates calculations a bit.

Using a simplified example, if one had bought 100 acres at $1000 an acre and sold it for $10,000 an acre, this would represent a gain of $900,000. The basis is what you paid for the land, in this case, $100,000. The gain is the difference between the sales price and the basis or $900,000.

The federal and state government will now relieve you of roughly 28% of your gain, so around $250,000 dollars in this example. While some might be happy to make this kind of donation to the federal government, most would prefer to keep control of their proceeds.

Luckily, there is still the opportunity to shield your money from the IRS through a 1031 tax deferred exchange. If you roll your money into another “like kind” property, then you don’t have to pay any taxes on the gain. Although it doesn’t actually make the tax burden go away, it keeps you from having to give away money at the current confiscatory rate.

Like kind properties in a 1031 tax deferred exchange are loosely defined as something that provides the same benefit. In the case of real estate, it means basically anything that is income producing. A farm can be exchanged in a 1031 tax deferred exchange for commercial property or rental properties like apartments or development land. This flexibility allows someone to take their money out of one type of investment and either replace or diversify with another.

With the certainty that some real estate will increase in value while others may drop, it’s beneficial to have the opportunity to swap real estate investments without a tax penalty. Sterling Land Company has participated in many 1031 exchanges over the years. We have the knowledge and expertise to assist you in this tax saving venture.

Sterling Land Company acknowledges that we are not tax experts, so it’s best to seek professional legal advice when considering a 1031 tax deferred exchange.

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