If you own commercial real estate, taking advantage of a tax term known as a 1031 exchange could potentially save you millions of dollars in taxes when it comes time to sell the property.

During the latest “The Commercial Real Estate Hour” on KHTS, Host Jesus Henao of Leola Commercial Inc. invited Anthony Phillips, president of Downstream Exchange and partner/CPA at Phillips & Company, to talk about the significance of a 1031 exchange.

“That’s a very narrow area of the tax code. It’s one section, and what that one section allows you to do, if you do everything right, is to sell a piece of investment real estate, buy another piece of investment real estate and never pay the tax,” Phillips explained. “A lot of people do it, and people who aren’t doing it are just missing out.”

Related: The Commercial Real Estate Hour: How To Get A Real Estate License

Phillips noted that the technical terminology for what a 1031 exchange allows is to defer the taxes to the next property, adding that many people will “exchange and exchange and exchange” to keep the benefit going.

“I’ve seen some people … up to 25 different exchanges,” he said, “so people really do this.”

Without a 1031 exchange, Phillips noted that a commercial real estate owner would typically pay about 20 percent in federal taxes.

“If I sold a $5 million property and my tax on that sale would be about a million bucks, that’s a lot of money to give Uncle Sam,” Henao said, adding that this doesn’t even include the additional estimated 10 percent in state taxes that would need to be paid as well. “If you’re holding onto that type of real estate, you need to know this.”

When it comes to determining if you’re eligible for a 1031 exchange and what steps need to be taken in order to complete one, Henao advised seeking professional help.

“Unfortunately that area of the code is very restrictive and very difficult to understand,” Phillips said. “What happens is, any time the IRS or federal government gives you anything, they make you adhere to the absolute letter of the law, and unfortunately you can’t just read the law. What you have to do is, you have to read the court cases, read the revenue rulings, read regulations… And of course we’ve read everything you can read about it.”

“We’re talking about 30 percent in taxes,” Henao added. “That’s a lot of money… So if you’re paying the tax, you need to call us.”

Leola Commercial, Inc.

26575 Ruether Ave 2nd Floor

Santa Clarita, CA 91350

(818) 570-3301

Leola Commercial, Inc. is a boutique Santa Clarita commercial real estate firm that specializes in the sale of multi-family apartments, land for development, retail real estate, senior housing, tax credit properties, industrial, NNN and office. Headed by Jesus Henao, the Santa Clarita real estate firm prides itself on maintaining “old world” customer service principles and personalized representation. Henao is also the host of “The Commercial Real Estate Hour” on KHTS Mondays at noon.

Leola Commercial, Inc. – Santa Clarita

https://www.youtube.com/watch?v=-oluf8S5yvA

Leola Commercial Inc., Commercial Real Estate, Multi-Family Apartments, Santa Clarita Commercial Real Estate, Land for Development, NNN, Retail Real Estate, Santa Clarita Real Estate