Home » Real Estate

Understanding The 1031 Tax Exchange

Nov 13, 2007
Real estate investors looking to sell an investment property and purchase a new one can greatly benefit from the Internal Revenue Code Section 1031. Section 1031 is one of the most powerful tax deferral tools currently available for taxpayers.

In short,this section allows for a tax-deferred exchange. This means that taxpayers do not have to pay income taxes when they sell an investment property and reinvest the proceeds from that property into a like-kind or similar asset.

A 1031 Exchange comes with numerous advantages for taxpayers and paves a road of encouragement for real estate investors so that they might continue to invest. First and foremost, Section 1031 gives the taxpayer the ability to sell business, investment and income property and not pay federal income taxes on it if they replace the sell with a like-kind property.

According to the IRS,like-kind properties must be the same in character or nature. They can, however, be different in quality or grade. Real estate investment properties that qualify under this IRS code include rental houses, retail and commercial properties, apartment buildings, office and industrial buildings, ranches and undeveloped land.

Properties that do not qualify under a 1031 Exchange are personal residences, interests in partnerships, business inventory,and property owned by dealers.

While Section 1031 obviously presents a big perk for real estate investors,there is a disadvantage. Because the exchange reduces the basis for depreciation on the replacement property, the replacement property will then include a deferred gain that will be taxed in the future when the taxpayer sells his or her investment.

There are four types of exchanges made possible through Section 1031. First,is a simultaneous exchange. This type of exchange occurs when the taxpayer closes both properties on the same day. This is usually a back-to-back transaction with no lapse of time between the closings.

Second is a delayed exchange, also known as a "Starker Exchange." This type of transaction refers to the closing of the replacement property after the closing of the relinquished property. A delayed exchange does not take place on the same day. The delayed exchange is mandated by strict time frames pursuant to Section 1031. Specific timelines are in place to allow the taxpayer a certain amount of time to search for a replacement property and sign a contract to purchase it.

Next is the reverse exchange also known as the title-holding exchange. This is an exchange that occurs when the replacement property has been closed on prior to the selling of the relinquished property. When entering into this type of an exchange, the intermediary will retain the replacement property's title until the taxpayer closes the relinquished property.

Lastly, is the improvement exchange which also serves a title-holding exchange. This type of exchange refers to a situation that involves the taxpayer purchasing property and arranging improvements for it before it is actually received as the replacement property.

Since Section 1031 does not allow the taxpayer to improve the property, a mediator is employed to retain and close on the title of the replacement property until it is ready to enter as an exchange. Once the improvements are complete the liaison then passes on the title to the taxpayer.

As you can see, there are several situations applicable to Section 1031 that benefit real estate investors. To learn more about IRS Code Section 1031 and how to profit from it, contact your financial advisor or accountant.
About the Author
Omar Johnson is a successful Real Estate Investor and author of the home study course The Real Estate Investor's Guide To Finding The Motivated Seller for more info http://www.findingthemotivatedsellers.com
Rating:
Please Rate:
(Average: Not rated)
Views: 144
Print Email Report Share
Article Categories
    • Artists
    • Gambling
    • Humanities
    • Humor
    • Movies
    • Music
    • Photography
    • Tattoos
    • Television
    • Classic Cars
    • Motorcycles
    • Recreational Vehicles
    • SUVs
    • Trucks
    • Vans
    • Branding
    • Business Opportunities
    • Careers and Jobs
    • Corporate
    • Customer Service
    • Direct Mail
    • Entrepreneurship
    • Ethics
    • Financing
    • Franchising
    • Home-Based Business
    • Human Resources
    • Import and Export
    • Leadership
    • Management
    • Market Research
    • Marketing and Advertising
    • Negotiation
    • Network Marketing
    • Networking
    • Organizational
    • Presentation
    • Project Management
    • Public Relations
    • Small Business
    • Strategic Planning
    • Team Building
    • Telemarketing
    • Training
    • Data Recovery
    • Databases
    • Games
    • Hardware
    • Networks
    • Operating Systems
    • Programming
    • Security
    • Software
    • Spyware and Viruses
    • Ask an Expert
    • College and University
    • Home Schooling
    • K-12
    • Languages
    • Online Education
    • Psychology
    • Accounting
    • Credit
    • Currency Trading
    • Debt Consolidation
    • Insurance
    • Investing
    • Leasing
    • Loans
    • Mortgage
    • Mutual Funds
    • Personal Finance
    • Stock Market
    • Structured Settlements
    • Taxes
    • Wealth Building
    • Coffee
    • Cooking
    • Gourmet
    • Recipes
    • Wine and Spirits
    • Acne
    • Aerobics
    • Alternative Medicine
    • Beauty
    • Cancer
    • Cosmetics
    • Depression
    • Diabetes
    • Diseases and Conditions
    • Fitness Equipment
    • Fitness
    • Hair Loss
    • Heart Disease
    • Medicine
    • Men's Health
    • Muscle Building
    • Nutrition
    • Skin Care
    • Supplements and Vitamins
    • Weight Loss
    • Women's Health
    • Yoga
    • Arts and Crafts
    • Babies
    • Collecting
    • Elderly Care
    • Genealogy
    • Hobbies
    • Parenting
    • Pets
    • Pregnancy
    • Woodworking
    • Feng Shui
    • Gardening
    • Home Appliances
    • Home Security
    • Interior Design
    • Landscaping
    • Affiliate Programs
    • Article Marketing
    • Auctions
    • Audio
    • Banner Advertising
    • Blogging
    • Broadband
    • Domain Names
    • E-Books
    • E-Commerce
    • Email Marketing
    • Ezines and Newsletters
    • Forums
    • Internet Marketing
    • Link Popularity
    • Pay-Per-Click
    • Podcasting
    • RSS
    • Search Engine Marketing
    • Search Engine Optimization
    • Security
    • Social Media
    • Spam
    • Video
    • Viral Marketing
    • Web Design
    • Web Development
    • Web Hosting
    • Copyright
    • Cyber Law
    • Intellectual Property
    • National, State, Local
    • Patents
    • Regulatory Compliance
    • Trademarks
    • Baseball
    • Basketball
    • Boating
    • Cycling
    • Extreme Sports
    • Fishing
    • Football
    • Golf
    • Hockey
    • Hunting
    • Martial Arts
    • Running
    • Scuba Diving
    • Soccer
    • Swimming
    • Tennis
    • Dating
    • Divorce
    • Marriage
    • Weddings
    • Astrology
    • Buddhism
    • Christianity
    • Faith
    • Hinduism
    • Islam
    • Judaism
    • Meditation
    • Metaphysical
    • New Age
    • Cable and Satellite TV
    • Cell Phones
    • Communication
    • Gadgets and Gizmos
    • GPS
    • Satellite Radio
    • Video Conferencing
    • VoIP
    • Addictions
    • Coaching
    • Goal Setting
    • Motivational
    • Stress Management
    • Time Management
    • Clothing
    • Electronics
    • Fashion
    • Gifts
    • Jewelry
    • Causes and Organizations
    • Environment
    • History
    • Holidays
    • Men's Issues
    • Nature
    • Philosophy
    • Politics
    • Women's Issues
    • World Affairs
    • Air Travel
    • Camping
    • Cruises
    • Destinations
    • Outdoors
    • Article Writing
    • Book Reviews
    • Copywriting
    • Fiction
    • Non-Fiction
    • Poetry
    • Quotes
    • Screenplay
    • Tools and Resources