Marketplace Update

Understanding How a 1031 Tax-Deferred Exchange Impacts Your School Business

Would you pay a $500,000 tax bill to the Internal Revenue Service (IRS) that was not necessary? The answer to this is a resounding “no.”

However, all too often this situation happens when an individual who sells their real estate asset(s) anticipates a profit and thereby creates a significant tax obligation, but does not receive adequate advice from a qualified tax advisor to understand their options.

A school business expert like Bailey Routzong, while not a tax advisor, can assist school owners in exploring alternatives to paying these large tax obligations from the sale of their school real estate. That alternative is based in Section 1031 of the Internal Revenue Code, which encourages investors to reinvest their money into similar capital assets that support the economy.

What Is a 1031 Tax-Deferred Exchange?

In simple language, a 1031 tax-deferred exchange allows the taxpayer to defer recognition of a tax obligation on the sale of capital assets if the sales proceeds are reinvested into another qualifying capital asset. That means selling your real estate and reinvesting the proceeds in “like-kind” real estate will allow you to defer paying a capital gains tax on your initial real estate proceeds.

For example, if a school business owner sold their school(s) to an all-cash buyer, he or she could reinvest the proceeds of the sale in an IRS Section 1031 tax-deferred exchange. This reinvestment would allow that seller to defer the significant federal and state capital gains tax, thus creating an even larger pool of money for reinvestment purposes. In many cases, this strategy can result in saving thousands of dollars in taxes, which is then reinvested for the seller’s benefit to produce more ongoing spendable income.

A 1031 tax-deferred exchange also means that if an asset is subsequently sold and the proceeds are not reinvested in a “like-kind” qualifying asset, the tax obligation would have to be recognized. The only method of avoiding the tax altogether is death of the taxpayer, whereby his or her heirs inherit the asset and its “tax basis” at current Fair Market Value; this implies that a subsequent sale would produce no taxable gain.

Maximizing After-Tax, Spendable Income

Bailey Routzong does not view client relationships as a “one-off” experience ending when the client exits the business. We assist our clients in an ongoing relationship that continues beyond a successful exit transaction all the way through post-sale investment opportunities to maximize their spendable income after taxes.

School real estate owners should utilize state and federal laws to legally maximize their financial benefit, which means reinvesting available funds to achieve maximum wealth accumulation.

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    Would you pay a $500,000 tax bill to the Internal Revenue Service (IRS) that was not necessary? The answer to this is a resounding “no.”

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