February 28th, 2010

Chances are you’ve heard someone mention the advantages of a tax deferred “1031 Exchange.”

While the process of selling and acquiring property in a 1031 exchange are fairly synonymous with a standard real estate sale, it is also unique because the transaction is treated as an exchange, as opposed to a sale. Since sales are taxable with the IRS and exchanges are not, hence the benefits of a 1031.

Real estate owners and investors should always consider an exchange when he/she expects to acquire a replacement “like kind” property subsequent to the sale of their existing property. Anything otherwise could result in the payment of a 20-30% capital gains tax, depending on the tax rates in your given state.

A 1031 exchange is similar to a traditional IRA or 401(k) retirement plan. When someone sells assets in tax-deferred retirement plans, the capital gains that would otherwise be taxable are deferred until the holder begins to cash out of the retirement plan. The same principle holds true for tax-deferred exchanges or real estate investments. As long as the money continues to be re-invested in other real estate, the capital gains taxes can be deferred.

Some of the rules regarding a 1031 Exchange include: the above mentioned “like kind” qualifications; a “Qualified Intermediary,” or QI, must handle all of the monetary proceeds from the original sale, and the replacement property must be subject to an equal or greater level of debt that the property sold.

The identification period, in which you must identify the new property to be acquired, is the first 45 days of the exchange period. The exchange period itself is a maximum of 180 days. If the Exchanger has multiple relinquished properties, the deadlines begin on the transfer date of the first property. The IRS notes that these deadlines may not be extended for any reason.

For more information, visit: http://www.law.cornell.edu/uscode/26/1031.html

“The opinions set forth in this article are subject to the disclaimer pertaining to IRS Circular 230 set forth herein.”

Unless expressly stated otherwise on this article, (1) nothing contained in this article was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained in this article relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this article.

 

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