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Not sure what all the fuss
is about?
Read on to learn about 1031 Exchanges
or feel free to contact us by phone at 301-261-6224 or by e-mail at efi@goldsteinandlevy.com. Thanks for
visiting!
What is a 1031 Tax Deferred Exchange?
Simply stated, a 1031 Exchange is a rollover of equity of like properties. Under section
1031 of the Internal Revenue Code, a taxpayer may completely defer payment of taxes by
trading, rather than selling his or her real estate. A 1031 exchange is an opportunity for
the seller and buyer of investment property, or property used in a trade or business, to
save in taxes and leverage income growth.
Selling a business or investment property typically requires payment of capital gains
taxes. The tax bill can be heavy depending on the property's appreciation in value and
length of time depreciated. However, under the 1031 Exchange, capital gains can be
deferred or avoided if you "exchange" the property through a "Qualified
Intermediary", i.e. a Title Company or a Realty Exchange Company.
How to go about a 1031 Exchange:
- Taxpayer finds a buyer and sells the property through a Qualified
Intermediary.
- Taxpayer finds another property that fits their needs.
- Taxpayer buys replacement property through the Intermediary. The
parties may not know each other and their properties can be in different states.
Guidelines:
You can buy replacement property or properties of any kind with your proceeds from the
sale as long as the fair market value totals less than 200% of the fair market value of
the relinquished property or properties.
The properties do not have to close at the same time. The taxpayer has 45 days after the
settlement to find replacement property(s) and 180 days (or before taxes are due that
year) to settle on the new property(s).
The Intermediary should be financially strong with knowledge to make the transaction
hassle and worry-free. You may want to search for a Realty Exchange Corporation. The
taxpayer's agent, broker, attorney, accountant, or family member is excluded as an
intermediary.
What is the benefit of not paying taxes now?
The wealth of using equity you save by not paying the taxes now can be used to buy more
investment property. And, when your heirs inherit your investment property, they take it
over at its current market value. Any tax liability will be limited to the gains from the
date of their acquisition, not during the years of your ownership. So, in essence the
taxes you are saving now are never paid.
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