Guide to 1031 Exchange
There is an inextricable link between government and business such that the actions of one often imposing consequences on the other. It is the task of government to keep the economy health through stimulations and one such is through giving tax incentives to certain types of businesses that patronize certain industries the enable the boosting of fledgling markets. The 1031 exchange is one such program because typically in a commercial real estate transaction, there are taxes imposed on the seller from any profit from the sale of his property. The 1031 exchange allows property sellers to remove this tax liability by reinvesting the proceeds from the sale of his property in another property. In the Internal Revenue Code Section 1031 is states that no gain or loss shall be recognized on the exchange of property held for us in a business or for investment.
The idea of the incentive is to defer taxes on gains incurred on the sale of your property as a means of moving it in a more effective investment that are greater in scale, more diverse or more aligned with your business or investment strategy.
There are, however, strict rules and guidelines that will determine a valid exchange. In order to prod a real estate industry inventory by the government, the rule established is that the total purchase price of the new property to be acquired must be equal to or greater than the total net sales price of the property being sold. You get disqualified for the exchange if you sell and purchase another with the proceeds on your own because the requirement is that there must be a qualified intermediary involved in selling and purchasing another one. These intermediaries are independent organizations or companies that work full time facilitating such exchange, by handling the funds from the original sale through the exchange process and then deliver the money to the closing agent. Any tax forms and exchange agreements related to the process is the responsibility of the intermediary to fill up.
Here is how to describe a 1031 exchange appropriately: If you are qualified for a 1031 exchange then your real estate sale and subsequent purchase have met all the requirements including the time frame given, and it is much like using government’s money to grow your holdings. If you are someone investing in real estate or you want to go that way, you can always trade up for increase value or rental income, by deferring capital gains taxes all the way. So with this 1031 exchange you don’t need to pay capital gains taxes for each transaction because this is put in the purchase of new property. The government becomes your partner in your growing real estate portfolio.
Besides, often people move or relocate and their real estate investments need to move with them as being an absentee Landlord has clear disadvantages. If you exchange your home with another property where you live then you can manage it more efficiently without paying taxes on the sales.