An Introduction to Tax Deferred Exchanges
A known fact is that a tax-deferred exchange is a fair and straightforward strategy that gives tax benefits to commercial property owners and thanks to this law real estate investors can sell or relinquish qualified property, reinvest the money made from that property and acquire a replacement property that is within the time confines and other regulations. There are plenty of advantages associated with a 1031 exchange, and one of the merits is that it allows the person to sell the investment property and reinvest it in a replacement property to defer ordinary income, depreciation recapture, or capital gain taxes. Taxes associated with such transactions are very significant especially when they are adjusted on a low-cost basis that is why this law was created to begin with.
A known fact is that by deferring taxes, the person can have more money available for investment and this increased buying power gives the buyer the extra leverage to acquire other similar property or some properties that have better investments than if the person sold the original property and paid all the taxes associated with the buying and selling.
The truth is that a 1031 is an awesome wealth building tool, and commercial property investments that frequently do 1031 exchanges throughout their lives can benefit from a good amount of cash flow and their net worth increases which are more than what a real estate investor that chooses to sell and pay taxes after each transaction gets. In theory, the investor could exchange into various investment properties over the years and even bequeath their children those properties at the time of their passing and at that time their kids could eliminate the cost burden altogether.
There are various demerits associated with a 1031 exchange such as having many procedures, regulations, and rules to adhere to. The IRS set up rules in the 1031 exchange in view of the competing interests of collecting taxes and reward taxpayers for investing back into the economy. If the regulations are adhered to the letter, there will be no income realized at the time of the commercial property exchange transaction, and if these rules are flouted, then the person could doom their tax status.
It is tough to meet the IRS rules and regulations, and it is not surprising that investors hit roadblocks when trying to comply with the 1031 Exchange regulations and one of the major issues is in finding a similar property within 45 days after the sale of a relinquished property. To make matters more complex, the IRS does not allow any extensions on this time, and this is why it is integral to meet a real estate advisory that specializes in identifying and structuring 1031 exchange opportunities.