1031 Exchange Info
Introduction to 1031 Exchanges
A 1031 Exchange (Tax-Deferred Exchange) Is One Of The Most Powerful Tax Deferral Strategies Remaining Available For Taxpayers. Section 1031 of the Internal Revenue Code is the basis for tax-deferred exchanges. Taxpayers should never have to pay income taxes on the sale of property if they intend to reinvest the proceeds in similar or like-kind property. Professionals involved with advising or counseling real estate investors need to know about tax-deferred exchanges, including Realtors, lawyers, accountants, financial planners, tax advisors, escrow and closing agents and lenders.
The Advantage of a 1031 Exchange is the ability of a taxpayer to sell income, investment or business property and replace with like-kind Replacement Property without having to pay federal or state income taxes on the transaction. A sale of property and subsequent purchase of a Replacement Property doesn't work, there must be an Exchange.
The Disadvantages of a Section 1031 Exchange include a reduced basis for depreciation on the Replacement Property. The tax basis of Replacement Property is essentially the purchase price of the Replacement Property minus the gain which was deferred on the sale of the Relinquished Property as a result of the exchange. The Replacement Property thus includes a deferred gain that will be taxed in the future if the taxpayer cashes out of his investment.
Exchange Techniques. There is more than one way to structure a tax-deferred exchange under Section 1031 of the Internal Revenue Code. However, the 1991 “safe harbor” Regulations established procedures which include the use of an Intermediary, direct deeding, the use of qualified escrow accounts for temporary holding of "exchange funds" and other procedures which have the official blessing of the IRS. Therefore, it is desirable to structure exchanges so that they can be in harmony with the 1991 Regulations. As a result, exchanges commonly employ the services of an facilitator known as a Qualified Intermediary with direct deeding.
Exchanges can also occur without the services of an Intermediary when parties to an exchange are willing to exchange deeds or if they are willing to enter into an Exchange Agreement with each other. However, two-party exchanges are uncommon since in the typical Section 1031 transaction, the seller of the Replacement Property is not the buyer of the taxpayer’s Relinquished Property.
Click Here for the 1031 Exchange Manual provided by 1031CPAS
