Basics of the 1031 Exchange
When a real estate investment is sold it is generally a taxable event. The proceeds of that event must be reported as income in the year the sale happens. However, there a some cases where this general guildline is not applicable. The purpose of this article will be to explain one of these exceptions: the 1031 exchange.
The 1031 Exchange Outlined
Per ferderal tax law, when real estate investments are exchanged under a very particular set of circumstances, taxes may be deferred. This tax deferral is allowed when the proceeds from the sale of real estate is used to purchase a like kind property as understood by federal tax law. In short, you put up for sale an investment property, give the funds from that sale to a qualified intermediary, then reinvest the funds into another real estate investment. Should this be performed the right way, with the right professional assistance, taxes are deferred as long as the capital remains invested.
When you consider selling a property you have several options
1. Sell your property and pay the capital gains taxes.
2. Sell your investment property, pay the capital gains tax, and then invest the the left over funds for you next real estate purchase.
3. Lastly, you can sell the property, work with a qualified intermediary, buy a like kind property and pay no capital gains.
Now, obviously we would all pick the third option if we understood the steps involved. It is highly recommended that each investor discusses their specific situation and needs with an experianced professional. While it is fairly simple but you do need to follow the guildlines carefuly or you may be subject to capital gains taxes. Follow the rules and you will be able to continue to realize the benefits of your investment without paying capital gains when you move your investment. This is of course very beneficial for people who have had real estate appreciate considerably and would like to invest in other types of property.
Before you do 1031 exchanges you need to grasp the following:
1. Like Kind Property
2. Qualified Intermediaries
3. Tenancies in Common
We reviewed the specifics and more. Of course you will need to consult a professional in order to ensure you really are able to meet the terms of Section 1031 of the federal tax code.
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