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1031 Basics
The 1031 tax deferred exchange is a powerful tool. It is the IRS approved method that enables you to sell your real estate property and reinvest in another property or properties, deferring federal (and most states) capital gains taxes. When the exchange meets the 1031 tax exchange criteria, the taxes are deferred until sometime in the future, usually when the newly acquired property is sold. For individually held investments, the deferral can continue through any number of exchanges until the tax liability passes into the individual's estate.
1031 tax-deferred exchange preserves equity and may indefinitely defer capital gains taxes, provided you comply with strict IRS guidelines.
The sale of a business or investment asset, whether it is real estate or capital equipment, can create a large tax liability. A properly structured tax deferred exchange under Internal Revenue Code 1031, however, allows businesses and individuals to defer the recognition of the capital gains or other taxes associated with the sale of most business or investment assets, as long as new assets are purchased to replace the existing assets. In general, most tax deferred exchanges are structured either as a real property or a personal property exchange. Real property exchanges include only interests in real property, while personal property exchanges encompass virtually all other types of property.
To be eligible for the favorable tax treatment afforded by an exchange, the property or business asset to be disposed of must have been held by the client for productive use in a trade or business, or for investment purposes, and be exchanged for like-kind replacement property that will be held by the client for similar purposes. Exchanges allow businesses and individuals the flexibility to sell property to whomever they wish, and to buy new property from whomever they wish. There is no requirement that property be "swapped" to be eligible for an exchange nor do exchange transactions require any significant changes to the terms of the sale and purchase agreements. By utilizing an exchange clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the exchange to acquire substantially more replacement property. Properly structured and administered, an exchange becomes an invaluable tax saving tool and an integral element of the business cycle.
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