Investments

A 1031 exchange refers to Section 1.1031 of the Internal Revenue Code which was passed in 1990. Normally, when you sell all real and personal property, the tax code requires the payment of the Capital Gains Tax. That is to say, when you sell your office for $100,000 more than you bought it for, you must pay the gains upon those earnings. However, after the passing of a 1031 Exchange that is no longer necessarily the case.

Bank Of America Investment What types of Property Qualify?

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.

Investment Opportunity A 1031 Exchange allows sellers of some real and personal property the opportunity to avoid paying capital gains taxes (which are 15% plus state taxes) by "exchanging" their sold property for newly purchased property. However, certain restrictions apply. The most important restriction is that only business property and investment property applies. So, an exchange under a purely residential home does not qualify, whereas exchanging a property that your business has used for its office, or even one used simply for investment diversification does.

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.

Banc Of America Investment But simply selling your office isn't enough to qualify you for a 1031 exchange. Rather, the code also requires that that you simultaneously buy a property of "like-kind." This does not mean that if you are selling a 2000 sq. ft. office you must buy a 2000 sq. ft office. Rather, the term is interpreted very loosely to mean virtually any real estate held for productive use in a business or for investment, whether improved or unimproved can be exchanged for any other property to be used for productive business or investment purposes. So, if you sell and unimproved lot of land and purchase an improved one or visa versa, this still qualifies, just as selling industrial property and buying rental resort property does. The point here is that while "like-kind" is an important restriction, it has been interpreted so broadly as to give individuals a lot of free reign.

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 The Exchange

Many companies offer a variety of insurances, in the event that you wish to protect your investments. Insurance companies insure anything from your car, house or business, to your life and health. Individuals attempt to enhance their financial capacity by investing money and minimizing their tax liability. Often people invest in 401K plans for retirement, or are curious about buying stock in particular public corporations. You should be aware of the legal obligations and risks involved in investments, as well as the potential tax consequences.

Investment Solution Strategic When most owners envision a 1031 exchange they envision a provision whereby they must buy and sell the two properties on the same week or even the same day. But that is not the case. A tax-deferred 1031 exchange allows up to 180 calendar days between the sale of the first property and the purchase of the second. But no matter the time between sale and purchase, a 1031 exchange is required by the Internal Revenue code to have a "qualified intermediary" to manage the exchange.

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Investment Banking Services A Qualified Intermediary

Bank Investment The requirement of a qualified intermediary is intended primarily to prevent individuals engaged in the exchange from using the time in between the sale and purchase of property to their financial gain. Although the seller has up to 45 days to set up the intermediary, the exchange is designed so that the seller should not profit from the use of the money before the purchase of the new property is made. An intermediary serves the judicial purpose of ensuring this. But it is important to remember that the qualified intermediary charges fee for this. While these services can vary in cost depending on the additional advisory services provided by the Intermediary, individuals interested in a 1031 exchange should expect to pay somewhere in the vicinity of $500 to $700 for the first exchange and $200 to $400 for each additional property.

Alternative Investment Dan Johnson enjoys writing about 1031 exchange.

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