What is the 1031 Exchange? Section 1031 of the US Internal Revenue Code allows investors to defer capital gains taxes levied on the exchange of property of the same kind. The key term here is "differ." The 1031 exchange is the method used to defer capital gains taxes levied on real estate transactions. 1031 exchanges (or tax-deferred exchanges) have great advantages for all types of real estate investors. Do you know about 1031 Exchange Vs. Delaware Statutory Trust? Check out how the Delaware Statutory Trust works.
What is the 1031
Exchange? Section 1031 of the US
Internal Revenue Code allows investors to defer capital gains taxes levied on
the exchange of property of the same kind. The key term here is
"differ." The 1031 exchange is the method used to defer capital gains
taxes levied on real estate transactions. 1031 exchanges (or tax-deferred
exchanges) have great advantages for all types of real estate investors. Do you
know about 1031 Exchange Vs. Delaware
Statutory Trust? Check out how the Delaware
Statutory Trust works.
1031
Exchange Vs. Delaware Statutory Trust
An
excellent tax loophole
Similar or comparable property exchanges are truly one of the
best tax loopholes for the average investor. What is the secret? You must
continue to negotiate property values to avoid taxes. For example, if he buys
a property that costs $ 100,000 and its value increases to $ 250,000, he will
profit $ 150,000 when he sells it. If you exchanged it for another worth $
100,000, the $ 150,000 profit will be taxed.
Therefore, the real tax benefit begins when you exchange one
investment property for another. There are specific guidelines for each contract.
Some general rules should be followed:
·
The exchange must be for a property "of the same
type." The application of this standard can be surprisingly free.
·
If the replacement property is not identified and is
not available when you sell your property, you can sell yours now and acquire
the replacement property within 180 days.
·
Proceeds from the sale of the surrendered property
must remain with a third party until they are used to purchase the replacement
property.
·
Within 45 days from the sale of the delivered
property, he must designate before the intermediary, in writing, the
replacement property he wishes to acquire. You then have 135 days to close the
deal.
What
exactly are the tax advantages of the1031 Exchange?
You can eliminate paying capital gains taxes and paying
higher taxes on the recovery of depreciation you earned on the property. Within
1031 Exchange, by exchanging yours
for a higher-value property, you'll also get additional deductions for the
depreciation that can increase your after-tax income.
Can I avoid
paying taxes forever?
Yes, you can. By following the rules of the 1031 exchange every time you sell one
or more properties and buy replacement properties when you pass away, your
assets will not pay capital gains taxes anymore.
How long
can it take me to buy a new property?
You have 180 days between the closing date of the sold
property and the closing date of the purchased property.
Can I buy a
new property before selling mine?
Yes, you can buy a new property before you sell yours and
still qualify for this is called a "reverse exchange." A qualified
broker will take title to the new property you purchase and hold it until you
sell yours.
Can I get
money from the 1031 exchange tax-free?
Yes, one way is by first finalizing the 1031 exchange and then refinancing the new property. Find out all
about the Delaware Statutory Trust here.
Can I buy
more than one property tax-free?
Yes, you can purchase any number of replacement properties.
Can I
exchange several small properties for one large one?
Yes, you can buy any number of small properties and exchange
them for a large one.
How do I
exchange for a large property (upgrade)?
You can improve 1031
Exchange by getting a better loan from the Delaware Statutory Trust for the new property or by adding money
or shares from other properties or promissory notes from the sale of other
properties, etc. Done right, it's all tax-free.
Are there
other reasons for the 1031 Exchange other than tax?
Yes, there are many non-tax reasons to trade. For example,
suppose you no longer want to manage the property. In that case, you can
exchange it for one property that does not need management or exchange several
smaller properties for one professionally managed.
Or, let's say your current property cannot be easily
refinanced. You can exchange that property for a new one that can be more
easily refinanced so that you can extract some money. You can also make a 1031 Exchange to improve the flow of
money.
