Frequently Asked Questions
1031 Property Exchange Overview

Nobody likes to pay taxes. And while this may be true, everybody generally accepts the notion that they are inevitable.  However, just because they may be ‘inevitable’ does not mean that planning and opportunity cannot convene is such a way as to minimize them.

When a property owner has invested in real estate for the purpose of making a profit, or for productive use in a business or trade, he/she will be taxed on any gain realized from the sale.

One way to protect the gain on such an investment is to defer the tax to a later date.  Under section 1031 of the Internal Revenue Code, gains from the sale of investment and business properties may be deferred by allowing the exchange or trade of one property for a ‘replacement’ property of “like-kind". The postponement of payment recognizes that the gain on the investment is only a ‘paper gain’. When a property owner trades one investment for another of like value, there is no cash to pay a tax.  In fact, it would be acceptable to consider that the investment has only changed in substance.

Paying taxes later rather than sooner offers several benefits.  The amount of the delayed payment is in effect, an interest free loan from the federal government.  This keeps those potential tax monies available for other investments.  Also, the time value of money allows the repayment of this ‘loan’ in the future with inflation reduced dollars.  And finally, there exists the possibility that the taxpayer may have a lower tax rate at that future date.

Eventually when the investor decides to sell and no further property exchanges are to be made, a tax on the gain must be paid.  Taxes on both the original deferred gain and any gain subsequent to all other exchanges become due.  

Many long time Hill Country property owners used their land primarily for ranching.  As prices have increased and ranching has become less economically viable, much of this land has become available and many investors have bought real estate in the Texas Hill Country.  As property values have continued to increase, the option of the 1031 tax deferred property exchange has allowed those investors to continue to participate in the growing market while maintaining a consistent capital position.

The Texas Hill Country offers opportunities to invest in real estate which could yield dividends in many ways.  Find out what possibilities exist for you to participate in the growth of our community and perhaps you will discover that you would like to invest yourself as well by relocating here and living the Fredericksburg Texas lifestyle.

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