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So named because it is defined in section
1031 of the IRS Code, 26 U.S.C. § 1031, this refers
to a commonly utilized tax break which allows capital
gains taxed to be deferred in certain cases in real
estate transactions. Considered one of the best ways
to preserve wealth, the 1031 exchange, or Like Kind
Exchange, generally allows a homeowner or real estate
investor to sell one property and defer all capital
gains taxes if the proceeds of the sale are reinvested
in an asset of like kind, generally in more real estate.
A 1031 exchange is a very beneficial
real estate tool that helps consumers to save quite
a bit of money from capital gains taxes. A 1031
exchange should be consulted with your mortgage
broker anytime a 1031 exchange could possibly be
applicable.
1031 exchanges are specifically structured
transactions that join together the sale of an old
property and the purchase of a new property for the
purpose of deferring taxes.
Exchanges are primarily used for buying and selling
investment real estate, but they can also be used
for personal property that is used in a business.
Examples of qualifying property include bare land,
rental property, commercial buildings and homes other
than your primary residence.
When doing a 1031 exchange, you will
need to make sure the replacement property is equal
or greater value to that which you are selling in
order to have a completely tax free exchange. Any
monies remaining, also called "boot" will be taxed
as capital gains.
Prudent use of the 1031 exchange can
shield all the capital gains on your properties until
you reach retirement. Other tax strategies can preserve
the gain thereafter. This makes real estate one of
the best investments available, provided you do your
homework.
The replacement property must be of
the same like and kind. This means that if you are
selling an investment property you must replace it
with another investment property, and not a purchase
a new primary residence. Before selling and purchasing
any property, be sure to speak with a CPA or accountant
to ensure proper compliance to the 1031 exchange regulation.
1031 exchanges can be done for situations
where the next purchase is for an equal or larger
amount than the selling price. This doesn't mean that
your next purchase has to be one property for a larger
amount but could be several properties that are for
a larger amount. Your escrow officer is best able
to explain all these ins and outs.
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Information listed above is to be used for educational purposes only and is not guaranteed
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