What is a 1031 Exchange?

Posted by Nick Niesen on November 8th, 2010

Many people who sell an investment property believe that federal capital gains from that sale must always be handed over to the IRS. This is not always the case. IRS Code Section 1031 offers investors the opportunity to reinvest federal capital gains from a sale if you swap that property for another?and it does not always have to be for ?like property? either! Instead, as an investor, you could have that money work for you rather than end up in the hands of the IRS. Further, you do not have to sell your property for the exact same type of property either!

The 1031 Code indicates that no gains or losses will be recognized on the exchange of any type of business use or investment property for any other business use or investment property.

So what does this mean? How can this help you?

If you own a business or an investment property you should consider a 1031 exchange. You would be able to defer 100% of both federal and state capital gains tax. 1031 Exchanges in essence become interest free loans; where the principal may increase through future exchanges allowing the Exchanger to never pay back, if the transactions are planned well. Along with the guidance of an experienced realtor, www.michaeltrustrealty.com this can be one of the most profitable ventures you will ever enter into.

Are you apprehensive about the 1031 Exchanges? Here are some interesting facts, which will make the decision easier.

1) At one time, exchanges were only done to switch like investment properties to the same person swapping for your own, but this is not the case anymore. In fact, you can sell your own property to someone who does not have a relationship to the person from whom they are purchasing the replacement property.

2) It is important to know that like-properties once met the same, condo for condo, empty lot for empty lot but that is also no longer the case. If you have invested your money in an empty lot but wish to exchange for an apartment building, this too is possible and again, no taxes would be paid for the sale of the vacant land when following the guidelines of the 1031 exchange. In fact, the owner of the empty lot can even sell that one lot and then purchase several others or just buy one and then sell others. Note, 1031 Exchanges only apply to investment properties and not residences.

3) Many believe only investors of large commercial properties can utilize a 1031. One of the greatest features about a 1031 Exchange is that it applies to all investment properties, large and very small. 1031 Exchange works the same way for a corporation selling a large shopping mall as it would for an individual selling a single-family property used for rental or held for investment in a resort area.

4) Many believe 1031 Exchanges are very complicated and not worth investigating. Consider working with a qualified Realtor® who can offer you professional advice and direction. 1031 Exchanges is a relatively smooth process and definitely worth considering but sound advice from an experienced Realtor® is the key to profitability.

5) The Exchanger can acquire a replacement property with greater income potential. For example, raw land can be sold to acquire income-producing property or a larger or more ideally located property. A duplex rental property can be exchanged for a 4-family investment property offering greater income.

Should you wish to increase your buying flow due to greater cash flow, exchange investment or rental property for that with a greater income, acquire investment property that is easier to finance, or should you have the need to relocate or the desire to increase your current business or investment space for a larger area, the 1031 Exchange can accomplish any or all of these goals.

Because a Realtor® is generally not licensed nor qualified to provide legal and/or tax advice, the above statements should be verified with your own competent tax and/or legal advisor who has specific infomration about your particular situation. You should only rely on your own competent tax and/or legal advisor?s advice. Nothing noted above is tax and/or legal advice. The above information is general in nature and is for general informational purposes only.