Some Things that You Must Know About 1031 Tax or Tax-Deferred Exchanges

While a lot of real estate investors in the US are aware of the 1031 tax-deferred exchange. There are those who were just able to discover this and some haven’t actually heard of this. Well, you should know that 1031 tax-deferred exchange is the sale or the disposition of the property and the acquisition of the like-kind property that follows the rules and structure of Section 1031 to defer the capital gain, the federal tax and also the depreciation recapture taxes. Know that the like-kind when applied to real estate is actually any investment real estate which comes with a few exceptions like personal residence. You may sell an office building and purchase a retail center or land in a 1031 exchange. You may sell the apartment building and purchase an industrial building.

The educated investors do know that they never have to pay the tax on their capital gains in the sale of the investment real estate. They can certainly do this if they would reinvest the proceeds in the more investment property. Also, they know how they can defer the tax due through reinvesting the proceeds into a different investment property. This is actually not a tax-free transaction but rather a tax-deferral which can surely go a long way and for any number of exchanges until the day that the investor or heirs would decide that they are going to cash out and pay for the tax.

You must know that section 1031 does not apply to exchanges of those items like notes, inventory, stocks, securities, bonds or the evidence of indebtedness or other types of assets. This is going to apply to some businesses out there and personal property like the boats, the trucks or planes.

When you make the decision about going to sell the investment property, then you need to determine if there will be enough capital gain with such relinquished property and whether this makes sense to do a 1031 in the first place when you were planning to reinvest in more property investments or the replacement property. An attorney or accountant can help you know the capital gains if you can’t.

The sale proceeds in the 1031 should be held by the independent third party. A QI or the qualified intermediary or exchange accommodator is a professional third party would manage the escrowed funds. When you would hold the sales proceeds, then you will just have to pay the tax. The QI handles the specific paperwork needed before you would sell the property, hold the funds in trust and then transfer the funds for acquisition of the new chosen properties, along with the other essential details.

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