1031 Tax Deferred Exchange

A 1031 Tax Deferred Exchange transaction permits the taxpayer to legally defer the payment of taxes on capital gains when an investment property is sold. In any 1031 Exchange, there are specific time limits and the taxpayer must utilize a "Qualified Intermediary" to conduct the exchange.

In a non-tax deferred transaction, the proceeds of an investment property sale are comprised of five parts:

A. Adjusted Cost Basis: The initial purchase price of the property, plus non-expensed improvements, minus depreciation taken.

B. Capital Gain: The profit from the increased value of the property:
Sales price minus transaction costs less the adjusted cost basis.

C. State Capital Gain Tax: The South Carolina capital gain tax rate is currently 7 %. However, South Carolina provides tax relief to investment property sellers by discounting the capital gain by 44 % - i.e. taxing on only 56 % of the capital gain.
(See example below)

D. Federal Tax on 'Gain Due To Appreciation': Uncle Sam's current tax rate on 'Gain Due To Appreciation' is 15 %.

E. Federal Tax on 'Gain From Depreciation Recapture': Uncle Sam also recovers a portion of the capital gain saved by the taxpayer through depreciation of the property. The current federal tax rate on 'Gain From Depreciation Recapture' is a flat 25 %.