| Home |  |
Properties | |
Buyer Form | |
NEWS! | |
About 1031 | |
NNN | |
Contact Us | |
About Us | |
Links |
| FINANCIAL NEWS | |
|
About 1031 Exchanges
Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment property for any other business use or investment property. 1031 Exchanges are not really exchanges in the context of two-party barter. Instead, they are typical sales and purchases that involve the same exact ingredients as any other sale or purchase, without the capital gains. The only real difference is the investor is increasing his selling and buying power by electing to avoid the drain of taxes under Section 1031 regulations. No other aspects of the transaction are affected. For a more detailed description read below. 1031 Exchange Rule: A property transaction can qualify for a deferred tax exchange only if it follows the 1031 exchange rule laid down in the tax code and the treasury regulations. The foundation of 1031 exchange rule is that the properties involved in the transaction (the property you sell and the property you buy) must both be held for productive purpose in trade or business or as an investment, and they must be like kind. 1031 exchange rule also lays down a guideline for the proceeds of sale. The proceeds from the sale must go through the hands of a qualified intermediary. In the event that the proceeds go through your hands or the hands of one of your agents, all the proceeds will become taxable. The entire cash proceed from the original sale must be reinvested towards acquiring the new property. Any cash proceeds retained from the sale are taxable. 1031 exchange rule requires that the replacement property must be subject to an equal or greater level of debt than the property sold. If not, the buyer will have two options. He can pay the tax on the amount of debt decreased or he can put in additional cash to offset the insufficient debt on the newly acquired property. 1031 Exchange Rule About Timelines: There are two timelines that anybody going for a 1031 property exchange should abide by: Identification Period: This is the period during which the party selling the property must identify other replacement properties that he proposes to buy. This period is scheduled as the 45 days following the sale of the relinquished property. This 45-day timeline has to be followed under any and every circumstance, and it is not extendable even if the 45th day falls on a Saturday, Sunday or legal holiday. Exchange Period: The period within which the person who has sold the relinquished property must receive the replacement property is referred to as the Exchange Period under 1031 exchange rule. This period ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property occurred, whichever is earlier. According to 1031 exchange rule about timelines, this 180 day timeline must be adhered to under any circumstance and is not extendable even if the 180th day falls on a Saturday, Sunday or legal holiday. Who Should Consider A 1031 Exchange? Anyone who is thinking about selling a business use or investment property should consider effecting a 1031 Exchange. An Exchange offers the astute investor an opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and put that money to work for himself. You work too hard to simply pay the tax without carefully considering this reinvestment option. Essentially, 1031 Exchanges should be thought of as an interest free loan from the IRS ; one in which the principal may be increased through subsequent exchanges and may never require repayment, if you plan properly. Misconceptions About 1031 Exchanges: 1. Many still believe that you must “swap” properties. Although this was required in the original code, this is rarely done in present times. 1031 Exchanges now enable one to sell their property to someone totally unrelated to the person from whom they are purchasing their replacement. 2. Many believe only investors of large commercial properties can utilize the benefits of Section 1031. The great thing about 1031 Exchanges is that it applies to all investment properties, large and small. It will work the same way for a corporation selling a large shopping center as it would for an individual selling a single family home used as a rental property in a vacation area. 3. Many believe you must acquire a property of "similar use or service." While 1031 exchanges are also known as "like -kind" exchanges, like-kind simply applies to real property held for business use or investment. Therefore, an investor may sell raw land and acquire a five-unit apartment building or sell a warehouse and acquire raw land. He can sell one property and acquire three or sell four and acquire one. Virtually any type of real property used for business use or investment will qualify. 4. Many believe 1031 exchanges are very complicated and not worth doing. The fact is that when working with a qualified intermediary who specializes in Section 1031 tax deferred exchanges, the exchange process is very simple. The intermediary will keep you aware of your time deadlines and ensure you do everything in strict compliance with IRS regulations. *This information has been provided to give you a basic overview of Section 1031 of the IRS Tax Code. We advise all of our clients to to conduct their own comprehensive review and analysis of the property, and encourage the consultation of competent legal and tax advise to determine the feasibility and suitability of acquiring any investment property. |
About the company | Contact Us