Make Money Online with Honeygain! - Download this free software for your Windows computer, Android or iOS phone and get paid to share your internet connection! Download, turn it on and earn!

Section 1031 Exchanges for Real Estate Investors

Posted by nick_niesen on November 8th, 2010

When a real estate investor sells real estate, a capital gains tax is recognized, along with a tax on deprecation recapture. The regular capital gains tax, deprecation recapture, and any applicable state tax can often result in a tax liability in the 20% to 25% range for the sale of real estate. (If the real estate has been held for less than 12 months, all of the gain will be taxed at much higher short term capital gains rates.)

A Section 1031 exchange, named for the applicable section of the Internal Revenue Code (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an investor to defer all tax on the sale of real estate if the real estate is replaced with other real estate pursuant to a detailed set of rules.

The replacement property must be identified within 45 days of the sale of the relinquished property. (1) The replacement property must be purchased within 180 days of the sale of the relinquished property. (2) The replacement property must have a purchase price at least as great as the relinquished property, otherwise some tax will be recognized. (3) All of the cash proceeds from the sale of the relinquished property, less any debt repayment and expenses of the sale, must be reinvested in the replacement property. (4) All of the cash proceeds from the sale of the relinquished property must be held by a Qualified Intermediary, which is a person or institution with whom the investor has not recently conducted other business. The investor must not have any access to the cash while it is being held. (5) The titleholder of the relinquished property must be the same as the purchaser of the replacement property. (6) The sale or purchase of a partnership interest does not qualify for a Section 1031 exchange, except under a few limited set of circumstances. (7) The relinquished property cannot have been classified as inventory, such as condominiums built by the investor, or lots in a subdivision that was subdivided by the investor.

If these rules are followed, real estate investors can sell current real estate holdings and replace them with other properties. A Section 1031 transaction is an excellent way for a retiring real estate investor to convert actively managed properties into passive properties, such as triple net leased properties.

Find Real Estate Investment Deals
BirdDogBot runs lightning-fast searches of freely available property listing sites for the best deals in your market that meet your investing criteria.
CryptoBits - Welcome to the World of Crypto!
Explore the world of Crypto and learn to invest and earn, play games and become a part of the decentralized world today!

Music Promotion Machine
Get instant access to a Proven strategy for getting More Fans, More Exposure, and Selling your Music online. Simple step-by-step video training that anyone can follow!

Learn to Play the Violin or Fiddle
Music is too precious and too important to limit access to it! Our mission is to bring the joy of music to as many people as possible, regardless of location, vocation, background, culture, or ability.

Advertise Here