1031 real estate exchange
Real Estate Exchange is a type of exchange of real property for real property, where the condition is that both should be like kind. The exchange may include vacant land, residential, commercial and long term leases. This exchange of property under productive use and investment enjoys a deferral in tax under the provision of 1031. Under normal condition selling any property is subject to IRS tax law, that is, capital gains are tax deductible. But the exchange of property under 1031 enjoys immediate relief from paying the tax.
Provision in the 1031 under Federal Law is that it permits a tax defer if the taxpayer decides on reinvesting the proceeds of the sale into purchasing another property. Many use this provision as it helps the taxpayers in wealth building by deferring the tax slap on selling of the real estate property. The condition under 1031 is that the purchase of new property is done within a limited time frame. The entire process of selling and buying is similar to any other such procedure under normal circumstances, but the transaction is treated as an exchange in order to make the deferred gain facilities available. It is important to note that the transaction follows IRS recognized approach. According to the US property consultants, 1031 is one of the best options for the tax payers to build wealth.
To understand the full benefit of 1031 you should remember the following points: (a. The purchase value of the replacements must be equal or greater to the sale value of the sold property. (b. All the proceeds received from the sale of what is called relinquished property must be invested to purchase the new real estate property which is popularly known as replacement property. Both the conditions are within the purview of the stipulated like kind property. Section 1031 does not recognize exchanges of bonds, inventory, stocks and other such modes of securities.
Understand the like-kind property
Properties can be like- kind if their nature is similar to each other. Grade or quality may differ. Personal properties of the same class can be considered like- kind property. But real property in the US and real property outside the US are not taken as like- kind.
Consider what to do and what not to do
- Any credit in your name on a closing statement is taxable and your fund used to purchase the replacement property has a chance to be reduced.
- Use all proceeds from the sold property to purchase the new
- There is a strict deadline for both identification (45 days) and exchange (180 days). Your attorney must recognize that and must not act on back dated and late identification which may jeopardize the entire exchange.
- Ideally sale should come through before purchase. Occasionally though dealings in desirable property is hurriedly done even before relinquishing the old property. It is called reverse exchange and it is possible in certain cases.
- The exchangers must not change the manner of title ship or partnership in time of exchange process. It may hamper the exchange.
Additional Benefits of 1031 Exchange
- Unproductive land can be exchanged for income producing property.
- Distant property can be exchanged for one closer to home.
- The taxpayer has creative and wide-ranging opportunities to buy and sell.
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