Where did the 1031 Exchange get its fancy name from?
The fancy name is taken from IRS code 1031. In a nutshell here is what a 1031 allows; when executing the sale/purchase of an investment property via a 1031 exchange, a taxpayer is allowed to defer capital gain taxes on like-kind exchanges. All properties utilized in a 1031 must be used for investment purposes.
Under normal circumstances, selling an investment property would bring upon a capital gain tax. To properly execute a 1031 exchange, you will need a Qualified Intermediary (QI). A QI is a third party that receives the proceeds of the investment property sale and holds them until a new investment property is purchased.
In short the entire process works like this:
- A seller hires a Qualified Intermediary.
- Seller sells investment property (relinquished) and designates new investment property (replacement).
- QI uses proceeds from sale to purchase replacement property. Under normal circumstances all capital gain tax is avoided.
- Replacement property is deeded over to investor.
This is an overview. Soon we will discuss in detail what like-kind exchanges are, the strict time frames for buying and selling, who a QI can and can not be, alternate ways to utilize a 1031, and more.
If you are a real estate professional such as a Realtor, lender, title clerk, appraiser, etc. you need to be aware of the 1031 exchange.
If you are an investor, even an investor with just one property such as a single family rental (which is becoming much more common with lease-to-purchase options, prior owner occupied properties becoming rentals, etc.), you need to have a fairly decent knowledge of how to utilize a 1031 exchange. It will save $1,000's +
Come back for our second part where we will go into more detail on how to properly utilize a 1031.
- Steve Kappre, Certified Mortgage Planner
It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.
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