1031 Exchange Basics
Fundamentals of the 1031 Exchange
When a real estate investments are sold it is generally considered a taxable event. The proceeds of that sales event need to be reported as federal income in the year the sale occurs. But, there are a few cases where this general rule does not apply. 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 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. 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 several options
1. Sell the property and pay the capital gains.
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. Last, you can sell the real estate investment, work with a qualified intermediary, purchase 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 guildlines and you will be able to keep on realizing the benefits of your real estate investment without paying the capital gains should 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 Property
2. Qualified Intermediaries
3. Tenancy 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.
