Thursday, April 10, 2008

Everything You Need To Know About 1031 Tax Deferred Exchange

If you're a real estate investment aspirant, then you might have heard about a way to defer tax payment for a sale. The technique is properly called 1031 Tax Deferred Exchange. But you might wish that you know more about it and how to avail for this tax law incentive.

The Section 1031 of the U.S. Internal Revenue Code says that an investor is allowed to postpone tax payment from a sale of a property provided that all the provisions of the section are followed to the letter. The first and foremost in this rule is that all the proceeds from the sale must all be used to purchase "similar" property - if you sold a house you can only buy another house to qualify.

Another condition you need to accomplish is that you must find a suitable property to exchange for the one sold within a specified amount of time, which is 120 days from the date your property is sold. After you have identified, meaning put the possible exchange property under contract, the acquisition must also be made within a specified amount of time from the date of identification - extension is not allowed. You should also know that the exchange property could not be a house you want to buy for self-use.

You need a lawyer or the service of a 1031 service company to set up everything for you. They will serve as the intermediary or the facilitator for the whole process. Your intermediary will take the property gain from you, buy the exchange property for you, and transfer the ownership to you as soon is it has been paid. This arrangement is provided by the IRS and must be followed at all times.

You must also remember to be explicit in your contract from the very beginning. From your contract to sell to your contract to purchase, you must state clearly that you want to evoke your right to avail for 1031 tax deferred exchange. Preparing the written papers is part and partial job of your lawyer or your intermediary.

There are basically five kinds of 1031 exchanges; the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common among all these exchanges is the delayed 1031 exchange. This is the kind of 1031 exchange being discussed above where in a time delay is allowed from the day of sale to the day of purchase.

The obvious benefit of 1031 exchange is that you can postpone the payment of the capital gains taxes until you do the final sale. You still have to pay the tax sometime in the future when you want to finally let go of the property for good or you can't find an exchange property in time. But in the meantime, would it not be great to skip taxes when all you want is to exchange your property for a more profitable one?

Lastly, smaller investors and those that are only starting in the business often think that 1031 tax deferred exchange is only available to established real estate investors. But you could not have been more wrong. This opportunity is open for all investors to avail as what the IRS code suggests.

Jacques Coquerel is a real estate investor based in Atlanta, Georgia. He has made more than 750 transactions since 1996. You may visit one of his sites and receive a 13-part FREE ecourse on real estate investing.

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