The 1031 Tax Exchange Explained
So you’re ready to sell your investment/business property - and “upgrade” into a new replacement. But you definitely do not want to have to share your profits with the IRS, who is no doubt going to want to their cut.
There is a way to avoid that. Thanks to the 1031 tax exchange law of the US Internal Revenue Code there’s a way investors like yourself can defer capital gains taxes on the exchange of properties similar to the one that you are giving up. Section 1031 exchange allows you to forego the payment of taxes on the sale of your investment property or business property - as long as you use the money from the sale to buy another property of equal or greater value.
The Benefits of the 1031 Exchange Law:
A) The property owners are able to eliminate taxes they would otherwise have to pay from selling their property.
B) The deferral of capital gains taxes keeps the money working for the owner, by encouraging them to buy more investment property.
What the 1031 tax exchange law does not include: Stocks, Bonds, Loans, Partnership Interest, Personal Residences, Certificates of Trust
…It’s good to know that Section 1031 states that you can defer your capital gains taxes as long as you purchase a property that is similar to the relinquished property. You can use the money you make from the sale of your investment-property to “upgrade” to another property of equal or greater value.
In order to qualify for a 1031 Tax Exchange you must make sure of the following:
A) The final sale price of your new property has to be of equal or greater value to that of the property you are selling.
B) The proceeds from the investment property you are relinquishing, absolutely must be used to buy the new property you want.
C) Then the replacement property you buy must be what is called, “like kind”. For example if your old property was used for business then the one you are purchasing must be used for the same.
After you have made sure of those necessary things you can begin the process of “exchanging” your property.
1. First you have to select some one who can do paper work and know about the 1031 tax deferred exchange.
2. Sell your investment property to the person who wants to buy and make sure you let them know that you are doing a tax deferred exchange.
3. Within 45 days or less identify your replacement property.
4. It’s now required that you choose your replacement property within the allotted 180 days.
Using a 1031 tax exchange can sometimes be a seemingly long process, but it’s definitely well worth it with the money you will save.