Whenever you have stocks, bonds, or real estate that you sell for more than what you bought them for, you have something called a capital gain. Capital gains are subject to capital gains tax, which can range from 5 to 15% in the United States of America. Fifteen percent is no small amount, especially considering the values at which these non-inventory assets are usually traded. It turns out that it Is possible to avoid capital gains tax by avoiding capital gains altogether.
That last statement may seem counter-intuitive and it may seem like someone has gone off the deep end by suggesting it. Why would anyone want to avoid making a profit off of stocks, bonds, real estate and the like? Well, due to the definitions it is not a capital gain until you sell the asset, so if there was some way to acquire different assets without actually selling the current assets, then technically no sale is made and thus capital gains and capital gains taxes do not apply. Long story short, you can get the most bang for your buck by circumventing capital gains tax.
How is this possible? In the United States of America, the Internal Revenue Code section 1031 specifically allows for the deferment of capital gains tax by means of a like-kind exchange. If one has assets that are to be traded for similar assets, then in theory one can utilize the entirety of the return of investment on the first set of assets instead of losing some to taxes. The degree similarity of assets allowed in these exchanges is covered in detail by the code.
For example, an investor buys a building suitable for a restaurant for 10,000 US dollars. After a couple of years of good management, he manages to increase the value such that he has made what he spent on it plus about 20 percent more.
Now, the investor feels that it is time to move onto a different business venture, but he needs the entire sum for a new investment, meaning he does not want to lose anything to taxes. This time he has his eyes on another piece of real estate that is worth roughly the amount of his current assets. He can then apply for a 1031 exchange, or an exchange of assets as permitted in Internal Revenue Code section 1031. He “trades in” his old restaurant for the new piece of real estate and since no sale was actually made, he is able to avoid paying capital gains tax and therefore maximize his assets’ growth.
There are many conditions that govern 1031 exchanges.
These guidelines specify what types of assets can be exchanged, the range of values permissible, the timeline for completion, and many other qualifying conditions and requirements. As such, the assistance of a Qualified Intermediary is required to complete a 1031 exchange. In any case, it is best to seek the services of a qualified professional when dealing with these kinds of things, since they can help you avoid doing anything illegal or wasteful.
Capital gains taxes can be circumvented by performing 1031 exchanges. In this manner, one can get the most value out of their investments. If you need more information related to real estate market, check
The San Diego Home Blog and
San Diego Listings Blog .
