1031 Exchange Basics
When a real estate investments are sold it is generally considered a taxable event. The proceeds of that event must be reported for federal income in the year the sale occurs. But, 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 Outline of a 1031 Exchange
Per ferderal tax law, when real estate investments are exchanged under a very particular set of circumstances, taxes may be deferred. This deferral of taxes is permitted when the proceeds from the sale of real estate investments is used to purchase a property that is a like kind property as understood by federal tax law. Basically you put up for sale a real estate investment, transfer the proceeds to a qualified intermediary, then reinvest the proceeds into another real estate investment. If this is performed correctly, with the appropriate professional assistance taxes are deferred as long as the capital remains invested.
When you consider selling a property you have a few options:
1. Sell your property and pay the capital gains.
2. Sell your property, pay the capital gains, and then use whatever is left to invest in your 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.
Of course most of us will chose the third option if we knew the steps involved. It is highly recommended that each investor discusses their specific situation and needs with an experianced professional. It is fairly simple but you do need to follow the rules carefully 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. Of course this is quite beneficial for those who have had real estate investments appreciate considerable and would like to invest in other kinds of property.
Before you do 1031 exchanges you need to grasp the following:
1. Like Kind Properties
2. Qualified Intermediaries
3. Tenancies in Common
We have reviewed these 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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