Working With A 1031 Exchange

Finding the right property, the right loans and the right people to work with are obviously great assets when investing in real estate. There are also ways to save money when you own property by discovering what a 1031 exchange is.

A 1031 exchange or tax-deferred exchange is a method for selling a property that is qualified, and then acquiring another qualified property within a certain period of time. It is unique in that the entire transaction is treated as an exchange rather than a simple sale, which allows the taxpayer to qualify for a deferred gain treatment. In other words, sales are taxable with the IRS, but 1031 exchanges are not.

Exchanging a property represents an IRS-acknowledged approach to the deferral of capital gain taxes, and it is extremely important to understand the components involved and the intent of such a tax deferred transaction. Anyone investing in real estate should use a 1031 exchange when he or she expects to purchase another property after the sale of the current investment property. Otherwise, they would have to pay a capital gain tax that could run over 30 percent in capital gain, determined by the federal and state taxes according to where they live. In other words, when you purchase a replacement property without the benefit of a 1031 exchange, your buying power is lessened and only represents 70 to 80 percent of what it once was before the exchange and payment of taxes.

The rules that apply for a 1031 exchange are the total purchase price of the replacement property must be equal to or greater than the total net sales price of the relinquished real estate property. All of the equity gained from the sale of the relinquished property must be used to purchase the replacement. If these rules are violated, a tax liability will be accrued to the person doing the exchange. IF the replacement property purchase prices is less, there will be a tax incurred. A property transaction can only qualify for a deferred exchange if it follows the 1031 exchange rule of the US tax code and the treasury regulations.

With property values down, you can get a bigger home using a 1031 exchange.  In addition,you might want to take advantage of a 1031 exchange with all the changes going on in Washington D.C.!

ABOUT THE AUTHOR:

Richard sells real estate in the San Gabriel Valley which is about 12 miles South of Los Angeles.  For more information, visit his website at http://www.westsangabrielvalleyrealestate.com