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There is no such thing as a free anything.
The famous "1031 tax free exchange" is actually just a temporary tax deferment.
IRS Guidelines. In general no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
Present tax law allows for a liberal IRS interpretation of like-kind exchanges so that property of one kind can be exchanged for property of another kind without creating a taxable event. These exchanges encourage and enable an orderly transfer of property ownership which usually results in fresh new management ideas and attitudes. Return to list
Defer capital gain. There is little doubt that the present capital gains tax is regressive to the US economy. The rate is too high and it penalizes gains that have come solely as a result of inflation. The tax on gain in value as ordinary income deters owners from selling existing properties to new investors who can often invest vital new capital for up-grades and modernization in America's deteriorating urban rental housing.
Most real estate and investment groups are pushing for legislation that would replace the present capital gains tax with a straight 50 percent exclusion and index both new and existing assets for inflation. That would certainly be a good initial step toward encouraging investment in productive assets like rental housing. Most economists also believe that depreciation recapture provisions for real estate should not be added to the tax code. Even if that gain was entirely as a result of inflation. As a result, there is more reason than ever before to utilize the 1031 exchange, rather than sell investment property outright. Return to list.
Exchanging up, defers capital gains taxes until the eventual sale of the asset and can increase tax shelter by the amount of the new depreciable value difference. All of the principals of using leverage to amass wealth apply.
Exchanging down, offers many interesting opportunities to the creative real estate investor. For example:
- Trade one large for two small. Sell one on an installment sale and keep the other for income production and tax shelter.
- Trade down to get a free and clear property. Re-finance the property and pocket the proceeds, tax free.
Return to list New tax laws may ease rules for 1031 exchanges Requirements have been eased for some like-kind exchanges, or sales where investment property is replaced.
Replacement property may now be bought before you sell the property you wish to exchange under the new 1031 rule. That means capital gains taxes can be deferred even if replacement property is bought first.
Until now, currently owned property had to be sold first in order to clearly defer capital gains. Now, IRS guidelines preserve tax deferral in some carefully structured deals where replacement property is purchased fewer than 180 days ahead of the existing property sale.
However, the property can't be directly purchased in advance; instead, an unrelated titleholder must temporarily acquire it. Return to list Property Exchange Resources
- Asset Preservation, Inc., a leading national IRC 1031 "Qualified Intermediary", has facilitated over 45,000 tax deferred exchanges and provides the highest level experience, expertise and security. One call to our trained Exchange Counselors is all that is needed to structure a delayed exchange or more complex improvement or reverse exchange.
- Real Estate Exchange Services Online. REES makes exchanging easy and affordable. With one phone call, we provide intermediary and consulting services for 1031 tax deferred exchanges, including reverse and construction transactions.
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