Investments

Section 1031 of the Internal Revenue Code (IRC) defines the 1031 exchange. 1031 exchange also known as Like kind exchange specifies that if an asset that is most often a land or a building, is sold and the proceeds of the sale are then reinvested in a similar type of asset then there is no gain or loss and the capital gains taxes are deferred.

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A 1031 exchange is an ideal way to suspend the taxes that are immediately due after the first sale. For instance if an investor purchases a residential property for say $250,000 and sells it for $30,000 after 5 years, the profit of $50,000 which he incurs will be subject to capital tax. But if the profit so accrued is invested in another similar kind of commercial real estate, there will be no taxation on it. So his taxes will be deferred to some date in future.

As a real estate investor, you probably are aware of the advantages of a 1031 exchange over outright sale of a property. An exchange defers your capital gains taxes, keeps your money working for you, and helps to build equity and maximize your returns. But 1031 exchanges are allowed not only for the good of the investor; by allowing investors to move their capital to the most advantageous investments, section 1031 stimulates the U.S. economy.

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1031 exchange is a source to save your money being spent in capital taxes, but on the same hand an individual should be careful and keep few points in mind before entering this exchange.

If 1031 exchanges are limited to the U.S. so that the economy will benefit and the IRS will be able to collect capital gains taxes in the future, then you may be wondering what rules apply to U.S. territories such as Guam, the U.S. Virgin Islands, and Puerto Rico. In private letter rulings, kind in an exchange with a U.S. producing, kind exchange, which merely state that the property must be held for your trade or business or as an investment.

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* Before entering the 1031 exchange, whether as an investor or a seller it is better to do a little research and consult your tax advisor to get an estimate on your tax exposure.

Posted by Taxemous Exchangemous on September 4, 30pm. Previous Post View Blog Posts Section 1031 of U.S. tax code is based on the idea of a mutually beneficial relationship between the real estate investor and the U.S. economy as a whole. 1031 exchanges allow investors to put their capital to work in the most advantageous ways possible, which in turn stimulates the economy by creating more jobs and greater opportunity in the U.S. This is one major reason why 1031 exchanges cannot occur outside of U.S. territory. In addition, a tax deferment means that the IRS will want to collect your capital gains taxes in the event that you someday sell your replacement property, and it can be very difficult for them to collect taxes on the sale of foreign property.

Banking Investment * Several assets such as boats, horses or cattle etc. qualify for the 1031 exchange but on the same hand only real estate can be exchanged for a real estate. So the real estate should be an investment property. A building purchased for renovations and selling and land purchased for construction of houses etc. cannot qualify for 1031 exchange because in such instances the owner does not intend to hold on to them for a period of time for investment reasons.

The reasoning behind the prohibition of 1031 exchanges involving property in a foreign nation is clear, but things become a bit more hazy when you consider U.S. territories such as Puerto Rico, Guam, or the U.S. Virgin Islands. You are in fact permitted to make an exchange on a property in one of these territories, but it is essential to be cautious when making a transaction of this sort.

Investment Solution Strategic * Further in order to have a cent percent tax deferment on the disposition of property, there are three basic steps to be followed. Firstly right after the sale of the original or relinquished property, it is necessary to acquire a replacement property as early as possible. The replacement property must be equal to or greater than the value of the relinquished property. Secondly those who wish to have 100% capital tax deferment must reinvest all of their net equity from the surrendered property in the replacement property. Finally one must assume debt on their replacement property that is equal to or greater than the debt on the original property. In case the debt on your replacement property is less than the debt on your original property then people seeking complete capital tax suspension should put in additional cash to balance the exchange transaction.

Investment Banking Services * There are certain rules to identify an adequate replacement property. For instance according to the three-property rule you may identify up to three replacement properties overlooking their fair market value. You may not purchase all the identified properties but it is best to have alternatives in hand. While under the 200 percent rule you are allowed to identify more than three replacement properties only on the condition that the fair market value of these properties does not cross 200 percent of the contract price of the property sold. In the 95 percent rule if the fair market value of more than three identified properties exceeds 200 percent of the value of the original property, the exchange can still hold id the 95 percent of the total cost of all the properties on the list are purchased.

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