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What is a Tax
Deferred Exchange? (1031 Exchange)
A tax deferred exchange is simply a method by
which a property owner trades one property for another
without having to pay any federal income taxes on the
transaction. In an ordinary sale transaction, the property
owner is taxed on any capital gain realized by the sale of the
property. A capital gain is the difference between
what you get from the sale of a property and what you paid
for it. But in an exchange, the tax on the transaction is
deferred until some time in the future, usually when
the newly acquired property is sold
These exchanges are sometimes called "tax
free exchanges" because the exchange transaction itself is
not taxed.
Tax deferred exchanges are authorized by
Section 1031 of the Internal Revenue Code. The requirement
of Section 1031 and other sections must be carefully met,
but when an exchange is done properly, the tax on the
transaction may be deferred.
In an exchange, a property owner simply
disposes of one property and acquires another property,
rather than the sale of one property and the purchase of
another.
Today, a sale and a reinvestment in a
replacement property are converted into an exchange by means
of an exchange agreement and the services of a qualified
intermediary - a fourth party who helps to ensure that the
exchange is structured properly.
The IRS' new regulations make exchanging
easy, inexpensive and safe.
Internal Revenue Code (IRC) Section 1031
is one of the last remaining tax loopholes. It is a powerful
tool that allows investors to exchange any investment
property for any other investment property. For your
exchange to be valid, you must follow specific IRS
regulations.
Here is an abbreviated list of the
regulations.
1.) The properties being exchanged must be
of a like kind. For example, you may exchange:
- a house for another house (or several
houses)
- a house for commercial real estate
- land for rental property
- a strip mall for an office building
- any investment property for any other
investment property (as long as it is not occupied as your
primary residence)
2.) You must identify and close on your
replacement property within a specific period of time.
3.) 100% of the proceeds from your current
property must be held by a Qualified Intermediary and
applied toward your replacement property to get a full tax
deferral.
4.) Your replacement property must be of
equal or greater value to the property you have sold to get
a full tax deferral.
5.) Properties being exchanged must be
used for investment. Personal residences are not
exchangeable.
Why use a 1031 exchange:
To
defer your capital gains tax
To diversify
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Exchange one property for a larger one.
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Exchange one property for several properties.
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Increase depreciation.
To
simplify
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Exchange several properties for fewer (or one) property.
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Improve the quality of your property.
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Decrease management responsibility.
To
relocate
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Exchange for a property closer to where you live.
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Exchange to an area with higher appreciation.
Please consult your tax advisor
ISLAND REALTY GROUP
PROUDLY SERVING THE ENTIRE SOUTH
JERSEY SHORE REGION!
1701 New Jersey Avenue - North
Wildwood, NJ 08260
(
609.522.4999
FAX 866.571.9766
Joe@IRGroupNJ.com
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