Everything You Need To Know About 1031 Tax Deferred Exchange
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by: JacquesCoquerel
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If you're a real estate investment aspirant, then you might have heard about a way to defer tax payment for a sale. The technique is properly called 1031 Tax Deferred Exchange. But you might wish that you know more about it and how to avail for this tax law incentive.
The Section 1031 of the U.S. Internal Revenue Code says that an investor is allowed to postpone tax payment from a sale of a property provided that all the provisions of the section are followed to the letter. The first and foremost in this rule is that all the proceeds from the sale must all be used to purchase "similar" property - if you sold a house you can only buy another house to qualify.
There is also a specified time frame from the date of sale for you to find a suitable property to buy in exchange for the one you sold. You have exactly 120 days from the day you sold your previous property to put a new property under contract for acquisition. You also need to make the actual purchase - exchange of ownership - for that property within specified amount of time also. And buying a property for your own use from the gains is not counted.
The IRS also requires you to hire the service of a lawyer or a 1031 service company to act as the intermediary during the process. Without these people, you cannot be eligible for the 1031 exchange privilege. The intermediary is uncharged to handle the paper works involved in the process. They are also tasked to take the capital gains from you, purchase the exchange property on your behalf, and transfer the ownership to you.
You must also remember to be explicit in your contract from the very beginning. From your contract to sell to your contract to purchase, you must state clearly that you want to evoke your right to avail for 1031 tax deferred exchange. Preparing the written papers is part and partial job of your lawyer or your intermediary.
The five kinds 1031 exchanges include simultaneous, delayed, build-to-suit, reverse, and personal property. The kind of 1031 exchange discussed above is the delayed kind, which is the most popular in real estate. This kind of 1031 exchange involves an allowed delay of time from the sale of the property to the purchase of the exchange property.
The obvious benefit of 1031 exchange is that you can postpone the payment of the capital gains taxes until you do the final sale. You still have to pay the tax sometime in the future when you want to finally let go of the property for good or you can't find an exchange property in time. But in the meantime, wouldn't it be great to skip taxes when all you want is to exchange your property for a more profitable one?
This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply. No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.
About the Author
About the author: Jacques Coquerel is a real estate investor based in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course.
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