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The IRS 1031 Tax Deferred Exchange Defined
Congress
requires the recognition of taxable income on any sale or
exchange that is not specifically exempted from taxation under
the Internal Revenue Code. Congress, through Section 1031 of the
Internal Revenue Code, has provided that a real property owner
who sells his property and then turns around and reinvests the
proceeds in ownership of like-kind property can do so without
paying the capital gains tax. To qualify as a like-kind
exchange, property exchanges must be done in accordance with the
rules set forth in the tax code and in the treasury regulations
The tax
deferred exchange is authorized by Section 1031 of the
Internal Revenue Code. The requirements of Section 1031 must be
carefully met and when the exchange is done properly, the tax on
the transaction is deferred.
Tax Deferred Exchanging is an
extremely powerful investment technique which allows your tax
dollars to remain invested in property rather than being paid
out as income tax. Exchanging allows a buyer to leverage the
deferred tax savings into alternative real estate properties
that can produce additional cash outflows and create wealth.
Tax deferred exchanging
should be considered by anyone
who owns investment real estate. The IRS’s regulations make
exchanging easy, inexpensive and safe. In an exchange the owner
simply disposes of one property and acquires another property
through of an exchange agreement and the services of a qualified
intermediary who helps to ensure that the exchange is structured
properly.
Section 1031 of the Internal Revenue Code states “No gain or
loss shall be recognized if property held for productive use in
a trade or business or investment purposes is exchanged solely
for property of a like-kind.”
Single or multiple properties may be exchanged in the
transaction. The first step of the exchange occurs when the
relinquished property sells and the proceeds are held by a
“Qualified Intermediary.” The
second step involves identification of replacement property and
the held proceeds are released at closing. An Exchange Agreement
and Assignments are utilized for all properties in an exchange.
Specific requirements defined in Section 1031 include a 45 day
identification period, a 180 day period in which to close on a
replacement property and the use of a “Qualified Intermediary”
as the taxpayer cannot receive any proceeds from the sale of the
relinquished property either actually or constructively.
Some Definitions For Requirements of Section 1031
PLEASE BE ADVISED THAT
NOTHING HEREIN IS TO BE CONSIDERED TAX OR LEGAL ADVICE. IF TAX OR
LEGAL ADVICE IS NEEDED, AN ATTORNEY, ACCOUNTANT OR OTHER
QUALIFIED COUNSEL SHOULD BE OBTAINED.
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