WHAT IS A 1031 EXCHANGE?
The 1031 tax deferred exchange is a powerful tool that provides that no gain or loss will by recognized on the exchange of any type of business use or investment property for any other business use or investment property. Simply stated at 1031 exchange enables an individual to sell real estate property and reinvest in another property or properties, deferring federal (and most state) capital gains taxes. When the exchange meets the criteria, the taxes are deferred until sometime in the future, usually when the newly acquired property is sold. For individually held investments, the deferral can continue through any number of exchanges until the tax liability passes into the individuals estate.
WHO SHOULD CONSIDER A 1031 EXCHANGE
Anyone who is thinking about selling a business use or investment property, including raw land, should consider a 1031 Exchange. An Exchange offers the investor an opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and put that money to work for himself. You work too hard to simply pay the tax without carefully considering this reinvestment option. Essentially, 1031 Exchanges should be thought of as an interest free loan from the IRS; one in which the principal may be increased through subsequent exchanges and my never require repayment, if you plan properly. The tax dollars saved by an exchange may be maximized to increase an investors overall net worth. Ultimately, the exchange process allows investors to reorganize and improve their real estate portfolios to best suit their unique interests and needs.
MISCONCEPTIONS ABOUT A 1031 EXCHANGE
Many still believe that you must swap properties. Although this was required in the original code, this is rarely done in present times. A 1031 Exchange now enables one to sell their property to someone totally unrelated to the person from whom they are purchasing their replacement.
Many believe only investors of large commercial properties can utilize the benefits of Section 1031. The great thing about 1031 Exchanges is that it applies to all investment properties, large and small. It will work the same way for a corporation selling a large property as it would for an individual selling a single family home used as a rental property in a vacation area or a several acres of land purchased as an investment.
Many believe you must acquire a property of similar use or service. While 1031 exchanges are also known as like-kind exchanges, like kind simply applies to real property held for business use or investment. Therefore, an investor may sell raw land and acquire a five-unit apartment building or sell a warehouse and acquire raw land. He can sell one property and acquire three or sell four and acquire one. Virtually any type of real property used for business use or investment will qualify.
For additional information on 1031 Tax Deferred Exchanges contact Land Brokers, Inc. at 706-965-9000 or mail@landbrokersinc.com.