1031 Exchanges: The Basics
1031 Exchange Basics
When real estate is sold it is generaly a taxable event. The proceeds of that sales event need to be reported as 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 1031 Exchange Outlined
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.
So, when you consider selling your property you have several options
1. Sell the 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. Last, you can sell the real estate investment, work with a qualified intermediary, purchase a like kind property, and pay no capital gains.
Obviously, most of us will choose the third option if we understood what was 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 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 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.
