Building Wealth via the 1031 Exchange

Written By Gerald F. Baker, III

Section 1031 of the Internal Revenue Code is a popular investment strategy that allows an investor to defer capital gains tax that may arise from the sale of a business or investment property. By using the proceeds of the sale of the property to purchase a replacement property that is considered ‘like-kind,” property owners may defer taxes if certain guidelines are followed. By leveraging a 1031 exchange, high net worth clients may have hundreds of thousands of dollars more available for reinvestment into other real estate assets, which can, in turn, grow a financial professional’s business..

The hypothetical example below illustrates that both investor A and B sold an investment property that earned sales proceeds of $1 million. Investor A opts to sell the property outright and pay capital gains tax on the gain he received from the sale, which is 20 percent.1 Investor A must also pay a depreciation recapture tax of 25 percent2, taken on the amount the property had depreciated over its lifetime. Investor B elects to execute a 1031 exchange transaction, deferring all capital gains taxes, including the depreciation recapture tax, which may have been assumed otherwise.

Hypothetical 1031 Exchange Comparison

As shown in the example, INVESTOR B may be able to reinvest the full $1 million, thereby growing wealth.

Content courtesy of Inland.

Gerald F. Baker, III

After working in various institutional investment firms, Jerry Baker founded Baker 1031 Funds, an investment firm dedicated to providing individual real estate investors with tailored 1031 exchange solutions. Baker 1031 Funds was established with the mission of offering individual investors the same opportunities as institutional investors, enabling them to enjoy the benefits large institutions typically have—without compromising what matters most to the individual investor.

Before founding Baker 1031 Funds, Jerry held key positions in the real estate private equity and hedge fund sectors. He served in various roles, including as a member of the investment committee, portfolio manager, and trading desk director. Over the course of his career, Jerry has been involved in more than $10 billion in commercial real estate transactions.

Much of Jerry’s real estate and investment expertise stems from his time spent working alongside his father and uncle in the family business. Whether underwriting potential acquisitions with his father or assisting his uncle with property maintenance, Jerry developed a hands-on understanding of real estate investing. These experiences not only equipped him with valuable skills but also gave him insight into the advantages institutional investors hold over individual investors, as well as a deep appreciation for the goals and challenges individual investors face.

Jerry is dedicated to supporting children's organizations in Detroit, Los Angeles, and New York. He is also an active contributor to the Babson College Alumni Association, focusing on student finance and real estate initiatives.

https://baker1031funds.com
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Opportunity Zones or 1031 Exchanges