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Denver Commercial Real Estate and 1031 Exchanges

June 29, 2016

The commercial real estate market in Denver has been hot for the past several years. As more and more people move to the area, an increasing number of rental and commercial opportunities are coming to the area. Many investors intend to buy properties to use them for rental income but as more neglected areas of the city become developed, the idea of improving existing properties is often appealing for a much quicker turn in profit. Many think that the key to making this venture profitable is simply finding the right properties and hiring the right contractor. While that is important, the key to maximizing profitability for an investor is understanding capital gains and losses, and taking full advantage of 1031 exchanges.

What are capital gains and losses?

The obvious goal of investing in anything is selling it for more than you bought it for. The profit that you’ve made on that sale is known by the IRS as a capital gain. Any money that you lose in the deal is a capital loss. Capital gains are broken down into two parts according to the IRS website, long term and short term gains. A short term gain is profit from a property that you’ve owned for less than a year, at which point it turns into a long term gain. The tax bite on a long term gain is less than that of a short term gain. The tax percentage varies greatly based upon a number of factors. At what rate will your long term sales be taxed? There are a number of resources available on the web, but these laws change all the time and are convoluted to say the least. It’s best to speak with a real estate investment specialist at the outset to come up with a viable plan to reduce your tax obligation.

What you need to know about 1031 exchanges.
Is the only answer to keeping the lion’s share of your profit to invest only in income rental property or to live in a house for more than a year before selling it? No, there is another way. According to Section 1031 of the IRS Tax Code, investors can defer capital gains taxes on the exchange of like-kind properties. A like-kind property is defined as any two properties that are considered to be the same type of property such as two houses, two apartment buildings, two warehouse spaces, etc. They do not have to be the same quality of property, just serve the same function. It is kind of a broad term, and as always there are exceptions so it is important to consult with an expert.

Coming up with an investment strategy.
Don’t lose up to 30% of your investment profit to Uncle Sam! Contact The Sherman Agency today to come up with a sound investment strategy to maximize profits and reduce tax obligation. If you're looking to invest in commercial real estate in Denver, our experienced team can help you through all phases of the investment process from shopping, to purchase, to sale. Call us today at 303-572-8778 for an appointment.