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Section 1031 of the IRS offers a golden opportunity for real estate investors to defer their capital gain taxes by reinvesting their sales proceeds in purchase of another like kind property. One important condition that governs this law is that the transaction needs to take place within 45 days of selling the property.

Bank Of America Investment The benefit potential of a 1031 exchange can be better comprehended if we look into a case study.

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.

Investment Opportunity An investor gains $400,000, by selling his land and incurs a total tax amount of $120,000. He is left with $280,000 after the transaction is complete.

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.

Banc Of America Investment If the seller wants to reinvest the proceeds for a new property, considering a 25% down payment with 75% loan to value ratio, he will be able to buy a property worth $1,120,000.

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 Had this been a 1031 exchange the seller could reinvest the entire sales proceed of $400,000 and with same loan to value ratio he could have availed a property worth 1,600,000.

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 With the increasing awareness about 1031 exchange and its benefits more and more people are investing in real estate, however, to gain the maximum out of it, it is important that we have a clear understanding of all the terms and conditions mentioned in this section of the IRS.

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Investment Banking Services The rules for a successful 1031 exchange has been clearly laid down in section 1031 of the IRS and can be explained as given below.

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• The foundation of 1031 exchange rule is that only properties held for productive purpose in a business or trade or for investment purposes qualify for a 1031 exchange.

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• The properties involved in the transaction should also be of like kind. Under Section 1031, one kind or class of property should be exchanged for another property of the same kind or class. A taxpayer's personal residence cannot be exchanged for income property, and income or investment property cannot be exchanged for a personal residence, which the taxpayer will reside in.

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• Section 1031 of the IRS also marks the guidelines about the sales proceeds. It stated that the entire amount from the sales proceeds should be reinvested towards acquisition of the new property. The sales proceeds should also go through the hands of a qualified intermediary and not through the seller or the seller's agent. Any cash proceed from the sale, if retained, becomes taxable.

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• For a successful 1031 exchange there are also some time limitations laid down in Section 1031, which needs to be followed.

  Investment Company Identification Period: This is a 45 days period from the day of selling the relinquished property during which the seller needs to identify a replacement property that he proposes to buy. This is a strict timeline and is not extended even if the 45th day falls on a holiday or on weekends.

  Investment Management Solution Exchange period: This is the period within which the seller of the relinquished property needs to receive the replacement property. This period ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property occurred, whichever is earlier. This is a strict timeline and cannot be extended even if the 180th day falls on a holiday or on weekends.

Investment Management Services These are some of the basic rules that need to be followed to complete a successful 1031 exchange. While qualified intermediaries are an indispensable party to a 1031 exchange transaction and can often provide good advice, it is advisable that you do proper study about this section of the IRS and consult a knowledgeable company for professional advice on 1031 exchange.

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