1031 Tax Exchange
1031 exchange:
Under section 1031 of the Internal Revenue Code, a real property owner can sell their property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages to real estate buyers. Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code.
Advantages
- Defer paying capital gains taxes.
- Leverage.
- A properly structured exchange can provide real estate investors with the opportunity to defer all of their capital gains taxes. By exchanging, the investor essentially receives an interest-free, no-term loan from the government.
- Relief from property management. The lessee takes the responsibility to sublet and maintain the property letting real estate buyers avoid most of the management tasks.
- Upgrade or consolidate property.
- Own multiple properties.
- Relocation.
- Differences in regional growth and/or income potential.
- Change property types through residential, commercial, retail, etc.
1031 exchange rules
The real property you sell and the real property you buy must both be held for productive use in a trade or business or for investment purposes and must be like-kind.
The proceeds from the sale must go through the hands of a licensed Attorney. If you try to forgo a licensed intermediary than the proceeds will become taxable.
All the cash proceeds from the original sale must be reinvested in the replacement property - any cash proceeds that you retain will be taxable.
The replacement property must be subject to an equal level or greater level of debt than the relinquished property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property.
