What is a 1031 Exchange?
The 1031 tax deferred exchange is a powerful tool. It is the IRS approved method that enables you to sell your real estate property and reinvest in another property or properties, deferring federal (and most state) capital gains taxes. When the exchange meets the 1031 tax exchange criteria, the taxes are deferred until sometime in the future, usually when the newly acquired property is sold. For individually held investments, the deferral can continue through any number of exchanges until the tax liability passes into the individual's estate.
To qualify for the tax benefits of a 1031 tax exchange, you must adhere to the strict rules set forth by the IRS. One of these rules states that you must place the proceeds from a sale with a "Qualified Intermediary." We will work closely with you and your Qualified Intermediary to ensure a smooth transaction. You must have a Qualified Intermediary before you sell your original property. If you do not have a Qualified Intermediary, we can help you find one.
Advantages to Exchange
1. More to Invest.
Because federal income taxes are deferred, the exchanger has greater leverage than if the tax liability was paid. The additional equity available for the reinvestment can also assist the exchanger in obtaining more financing, if needed.
2. Less Management.
Exchanges allow investors to acquire properties with less intense management responsibilities, as most of the management is delegated.
3. Diversification.
One large property can be exchanged into many smaller properties.
4. Greater Earning Potential.
Since more of the capital is reinvested than would be the case if taxes were paid, there is potential for greater earnings for the investor.
5. Compounding Effect.
Exchange after exchange can be done creating a positive compounding effect of reinvesting the additional deferred taxes on each subsequent exchange. The deferred tax liability can ultimately be forgiven upon death of the investor, giving heirs a stepped up basis on inherited property.
6. Pricing Flexibility.
The investor can experience greater pricing flexibility because the sale price of the relinquished property will not need to be inflated to cover capital gains taxes. This enables the seller to have increased flexibility with the selling price.
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