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What You Should Know About The 1031 Tax Exchange

May 24, 2008
When you run your own business, paying taxes can really take up a lot of your earnings. However, there are ways in which you can save on tax and the 1031 tax exchange is one of them.

The 1031 tax exchange is one of the most common types of tax deferral strategies used today. A 1031 tax exchange allows you to sell either an investment property or a business and then attain a property or business at the same, or for a higher, price. This has to be done within 180 days. It is the ideal way for real estate developers to save money on their taxes.

What You Should Know About 1031 Tax Exchange

Many people have never heard of the 1031 exchange and so they have no idea whether they could benefit from it or not. Basically, the 1031 tax exchange was created in 1990 and it was designed to help real estate investors. They benefit by re-investing the gains they make on similar properties which they exchange for their old ones. While it may seem like a simple tax deferral procedure, it is vital that you learn all about the 1031 exchange rules.

The capital made on the exchange should be dealt with through a qualified intermediary. That way you cannot be accused of keeping the money for financial gain. You have to invest the money into an account which should stay untouched until the end of the tax year. Now in order to benefit from the exchange, 1031 exchange properties have to be identified within 45 days of the sale of your previous property. Then the purchase should be completed within 180 days. Any property purchased later than that and you will not be entitled to the tax deferral.

While the benefit of capital gains is substantial within the 1031 tax rules, there are also a few other benefits that are not always noticeable straight away. These include:

You can add to your assets
You could upgrade to a property with a higher value
You can benefit from investing in lesser known markets

All of the above can really help you out. It is always a good thing to have more assets. Also if you follow the 1031 tax properly rules you could benefit by gaining a higher priced property. This is because as your existing property appreciates in value, you can then exchange the property for a higher value property because of the increased cash flow.

Finally if you have a rental property which has appreciated in value in a good market, you could re-invest the property into a lesser known market which is set to become a hot in the near future. This could potentially get you a lot of money.

So if you are looking to benefit from the 1031 exchange then ensure that you acquire the 1031 exchange properties within 180 days of the sale of your old one. The 1031 exchange rules have to be followed closely. If they are, you really can benefit from tax deferral at the end of the year.
About the Author
To learn more about the 1031 Tax Exchange, check out the 1031 Tax Exchange Web Site.
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