1031 Exchanges Explained
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 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.
Outline of a 1031 Exchange
Under federal tax law when real estate is exchanged under a 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. 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 your 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 you discuss your specific situation and needs with a experienced 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. 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. The Qualified Intermediary
3. Tenancy 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.
