What is a 1031 Exchange?

Posted: 02/21/07 6:15 pm

What is a 1031 exchange?

Under section 1031 of the Internal Revenue Code, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages to real estate buyers. Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code.

Who should consider a 1031 exchange?

If you have real property that will net you a gain upon sale (generally property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value), then you are exactly the person who should consider a 1031 exchange.

There are 5 tax classes of property:

1) Property used in taxpayer's trade or business.
2) Property held primarily for sale to customers.
3) Property which is used as your principal residence.
4) Property held for investment.
5) Property used as a vacation home.

Section 1031 applies to the first and fourth categories, and potentially the fifth category. Business use is defined as, "To hold property for productive use in trade or business."

Property retired from previous productive use in business can be qualifying property. Investment purpose defined as real estate, even if unproductive, held by a non-dealer for future use or increment in value is held for investment and not primarily for sale.

Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate. Property held for sale in the immediate future is not held for investment.

Why should you consider a 1031 exchange?

-Defer paying capital gains taxes.

-Leverage.

-A properly structured exchange can provide real estate investors with the opportunity to defer all of their capital gains taxes. By exchanging, the investor essentially receives an interest-free, no-term loan from the government.

-Relief from property management. The lessee takes the responsibility to sublet and maintain the property allowing real estate buyers to avoid most of the day-to-day management headaches.

-Upgrade or consolidate property.

-Diversify. Own multiple properties rather than just one.

-Relocation to a new area.

-Differences in regional growth or income potential.

-Change property types among residential, commercial, retail, etc.

To Get all The Details on 1031 Exchanges go to:

REALTOR.org has launched an updated guide to 1031, or tax-deferred, exchanges. This guide provides access to articles, manuals, forms, and ideas to help members start building their 1031investment property niche.

Link: http://www.REALTOR.org/libweb.nsf/pages/fg105

TYPE IN: 1031 EXCHANGE, INTO THE SEARCH BOX TO GET RESULTS

I hope this helps.

Joined: 15 Jan 2008 Posts: 39

1031s are like heaven to me, and I plan to do them as much as humanly possible... great explanation, Wallace, better than my teachers at real estate school,even... Of course they were teaching to the test, not for how things work in real life.

Still -- an explanation would've been nice.

Joined: 30 Mar 2010 Posts: 3

Well this exchange system can provide real estate investors with the opportunity to defer all of their capital gains taxes. By exchanging, the investor essentially receives an interest-free, no-term loan from the government.