1031 Exchange Lowdown Guide

By: Mansi Aggarwal
Submitted: 2007-01-17 16:16:43
Print this article | Tell a friend | For publisher | Social Bookmarking
Rating:
 

A 1031 exchange or Like kind exchange is defined by section 1031 of the Internal Revenue Code or the IRC. According to IRC if an asset, most often some form of real estate such as land or building is sold and the proceeds of the sale are re-invested in a similar asset then there is no gain or loss and the deferment of the capital gains taxes is permitted.

In order to qualify for the 1031 exchange, a set of rules is to be followed. Firstly both the relinquished as well as the replacement property must be held either for investment or for productive use in a trade or business. It is not possible to exchange a personal residence.

Secondly make sure that the nature of the assets is the same. For instance real property must be exchanged for real property and nothing else, personal property is to be traded with personal property only.

Thirdly the proceeds of the sale must be invested in a like kind of asset within 180 (property must be identified within 45 days) days of sale.

A 1031 exchange is a perfect way to suspend the taxes that are immediately due after the first sale. For instance if an investor purchases a residential property for say $250,000 and sells it for $30,000 after 5 years, the profit of $50,000 which he incurs will be subject to capital tax. But if the profit so accrued is invested in another similar kind of commercial real estate, there will be no taxation on it. So his taxes will be deferred to some date in future.

A 1031 exchange is akin to an IRA or 401K-retirement plan. When the assets are sold under the tax-deferred retirement solutions, the taxable capital gains would be kept in abeyance till they begin to cash out of the retirement plan. The tax-deferred exchanges or real estate investments also run on the same principle for till the time the money keeps on rotating i.e. re-invested in some or the other real estate, the capital gains taxes are subject to suspension.

The time an investor makes up his mind to follow a 1031 exchange, he should understand the process carefully with the help of a Qualified Intermediary. A Qualified Intermediary or an Accommodator is a corporation that performs the task of facilitating the 1031 exchanges. It is better to contact a Qualified Intermediary as soon as possible.

After you acquire complete information from the QI, display your investment property in the market. Once the offer to purchase the investment property is accepted, escrow for the sale is opened and preliminary title report is developed and produced. Following this the QI sends required exchange documents to escrow closer for signing at property closing. The moment the escrow is closed on the renounced property, according to the law within the first 45 days the investor has to identify replacement property. After a time of 180 days from the time the escrow closed, investor closes on the replacement property that was identified by him and hence the task of exchange is over.

The primary problem in 1031 exchange is the identification of the replacement property within tenure of 45 days after the sale of abandoned property. The extension to the 45 days is only on the front end and is possible with judicious planning about alternatives before the closing of the sale.

Mansi aggarwal recommends you visit 1031 exchange information for more information.

Article source: Expert Articles

Most Recent Articles in Taxes category

  • Use the Appraisal District's Information to Reduce Your Property Taxes - By: Patrick C O Connor
    Homeowners are amazed to learn they can obtain a copy of the appraisal district's evidence at a nominal cost. This is referred to as a House Bill 201 package, and is the only information many homeowners use to successfully reduce their property taxes.
  • Tax Return Outsourcing - Cost and Time Effective Services - By: Michelle Barkley
    Tax return outsourcing has simplified the cumbersome task of maintaining tax returns files and data in an efficient manner.
  • Optimise Savings with an Offshore Account - By: Isla Campbell
    Offshore accounts, based in the Channel Islands, the Isle of Man and Ireland, offer many benefits to those wishing to set up a savings account. But what are the advantages of cash conservation offshore.
  • Texas Business Personal Property Rendition and Taxation - By: Patrick C O Connor
    The Texas Property Tax Code for many years had required owners of business personal property (BPP) to annually render those assets used in a business. Rendering is summarizing to the central appraisal district the ownership and value of the assets. Historically, however, over half of all owners of business personal property have not rendered.
  • How to sustain current economic slump? - By: Mark Waltzer
    Small businesses need professional accountants but their services are too expensive so it's better to hire an outsourcing vendor providing cost-effective accounting services and allow them to take your business to next level.
  • Texas Property Tax Appeals - By: Patrick C O Connor
    Texas Property Tax Appeals Steps to Protesting and Reducing Your Property Value Annually
  • Taxes - By: Patrick C O Connor
    Taxes are a levy imposed upon people or legal entities by a governmental entity. There are many forms of taxes including income taxes, property taxes, capital gains taxes, consumption taxes, excise taxes, retirement taxes, sales taxes, tariffs, toll taxes and transfer taxes. This article focuses on reducing income taxes for real estate owners.
  • Gift Tax Valuations - By: Patrick C O Connor
    Gift tax valuations are prepared for many reasons. Gift tax includes market value of gifts to charity, market value of conservation easements and gifts in excess of annual limit. Well-reasoned planning of gifts can minimize gift taxes, income taxes, and estate taxes.
  • Please keep your hands out of my pockets Uncle Sam!: Business tax savings you should know about. - By: Amar Brown
    Many people are unaware that a business including a home based business can mean thousands of dollars in tax advantages per year. Thousands that you can put back into you pocket. Here are a few tips on keeping Uncle Sam Out of your pockets and keeping more of your hard earned money in.
  • Cost segregation - correctly depreciation real estate 10 - By: Patrick O'Connor
    Depreciation is an important non-cash tax deduction. By increasing tax deductions, commercial property owners affect federal income tax reduction. The increase in tax write-offs generates such a large tax cut that some wonder if it is a tax shelter or tax evasion scheme. It is not. Cost segregation is an IRS-guided process used to increase tax deductions during the tax preparation process. The IRS has provided a detailed explanation of the items that qualify for short-life depreciation and acceptable methodologies for performing a cost segregation study. Cost segregation studies performed by appraisers in compliance with the IRS's Audit Techniques Guide are unlikely to be challenged in an audit. Commercial real estate owners seeking tax advice and tax relief can benefit from reviewing the tax relief available from cost segregation.