Since the final regulations were adopted in 1991 concerning Internal Revenue Section 1031 for Tax Deferred Exchanges, the tax shelter has proven to be a powerful investment tool available to a wide range of taxpayers. Real estate investors, business owners, and taxpayers in general need to be aware of the practical benefits of a 1031 exchange.
What is a 1031 Tax Deferred Exchange?
The concept of the exchange is a non-simultaneous transaction. In other words, a sale of property with a reinvestment or acquisition of other property at a later time. Rather than having to directly swap properties with one party, you can sell to one party and then purchase property from other sellers. However, the entire exchange must be completed within a 180 day period.
What makes a 1031 Exchange valuable?
When you sell property, you are required to pay taxes on the gain. The Internal Revenue Code Section 1031 allows you to defer the payment of tax and provides you with more funds for reinvestment. These taxes may be paid at a later sale of the new asset or they maybe postponed indefinitely. Your heirs may inherit your property with a stepped up basis upon your death. In that case, the taxes would not have to be paid at all. Property held as community property may also have tax benefits that are realized upon the death of one of the spouses.
What kind of property is eligible?
Whether it is real estate(real property) or personal property, (tangible depreciable assets; i.e. airplanes, commercial trucks and equipment, IFQ’s, fishing permits or vessels, timber or minerals rights, etc.) the property given up and the property received must be held for productive business use, rental, or investment purposes. Properties held for primary residence or strictly personal use do not apply. Second homes/vacation homes have specific rules or “safe harbors” that apply. Please our RESOURCES AND DOWNLOADS for further information on second homes/vacation homes.
Defer capital gains taxes and protect your equity
with a 1031 exchange. Click here to START AN EXCHANGE.