A 1031 exchange, also known as a Starker exchange or a tax-deferred exchange, permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds into a "like-kind" investment property or properties. A 1031 exchange is enabled by Section 1031 in the Internal Revenue Code. |
1031 Explained..........
In order to completely defer the payment of tax with your 1031 exchange, among other things, the replacement property must be of equal or greater value, and all the equity from the sold investment property must be reinvested in the new investment property or properties. Internal Revenue Code Section 1031 is one of the single greatest wealth building tools available to the real estate investor. More people are beginning to take advantage of this tax code. Normally when you sell property, you must recognize a gain or loss in that transaction. If it is a gain, it is subject to tax (Federal capital gains tax, potential State income tax and potential depreciation recapture taxes). The tax implications to selling a property outright, can be devistating. Section 1031 allows investors to defer the payment of capital gains taxes when selling an investment property and exchanging into another investment property. Keeping more of YOUR money in YOUR pocket! That is not all....1031 properties can also be converted back into personal residences from investment properties. Of course, a qualified intermediary is required and the use of a tax professional is strongly encouraged to make sure the rules of 1031 are followed in accordance with the IRS. In basic terms you can think of it like this:... you are exchanging Property A for Property B. The sale proceeds from A are used to pay for the purchase of B, and by using a "Qualified Intermediary" (also called "Accommodator") to transfer both properties and funds, rather than you doing so directly, your tax liability is deferred. For example, Investor A is evaluating whether to exchange a rental property. Since taxes are paid on the capital gain, the following calculation will help to estimate the potential Federal tax liability. Here are some facts related to this example:
When selling investment property, you can generally expect to pay 15-25% of your capital gain in federal taxes, plus any applicable state taxes. Depending on the details of the transaction, this tax liability can be substantial. However, a 1031 exchange is used if you acquire other investment property while deferring the tax from your sale. The 1031 exchange is an invaluable tool for anyone selling and buying real estate. The use of a Qualified Intermediary is required. Many companies offer this service on a national level. For your convenience I have a link to a national company with a local team.
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The tax example above was provided by wamu 1031 |
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