1031 Exchanges Bypassing the Certainty of Taxes…
One of Benjamin Franklin’s well known quote is “In this world, nothing is certain but death and taxes.” So while the modern medicine community continues to work on a cure for mortality, 1031 exchanges offer a useful means against the shortcoming of the taxman. A 1031 exchange per IRS definitions is: Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due. Allowing the exchange of one property for another, this property market trend can allow you to hold on to money that might otherwise do to the Internal Revenue Service.
For the two real estate properties that are involve in the exchange be in use for trade or productive purposes, that means they produce revenue of some sort like rental properties or a vacation home. Eligible properties for this type of swap or exchange must be located in the United States, but anywhere within the country.
1031 exchanges necessitate the involvement of what are known as Qualified Intermediaries, who deal with the paperwork involved in the switch, and assume a role akin to a property purchaser. The property to be exchanged is handed over to this intermediary, until the property owner locates a new property, at which point the switch can be made.
This kind of property exchange operates under very strict guidelines and an demanding timetable. When the original property is sold, a list of possible replacements must be supplied to the intermediary with 45 days, while the exchange itself must be completed within 180. The title to both properties must remain intact throughout the entire process, so this is not the time to dissolve any business partnerships that might be involved. Any deviation from these rules can threaten the entire exchange process.
The properties that are to be involved in an exchange must also be what is described as like-kind, meaning that they are roughly comparable and any two assets or properties that are considered to be the same type, making an exchange between them tax free. This does not mean that the two properties must echo one another entirely, because the property relinquished and the one to be taken up must both be suitable for use in a similar business or investment related way.
Residential homes/houses do not qualify for a 1031 exchange so this is not of much use for many people. However if you own and operate a business property and would like to move premises without losing a certain amount of money to the IRS, then a 1031 exchange might just be the right choice for you.
This article is not tax advice. Please check with your financial advisor to obtain more information.