1031 exchange refers to a real estate transaction realized under the rules of Section 1031 of the Internal Revenue Code in order to defer relevant taxes until a future date. Section 1031 in the federal code provides that no gain or loss shall be recognized for tax purposes on the exchange of property held for productive use in a trade, business, or for investment. This transaction basically involves a property owner trading a property for another like-kind replacement property. The IRS sees the transaction as having reinvested the sale proceeds into another property, thus no economic gain has been realized that would generate the funds to pay the taxes.
Real properties are generally of like-kind, not considering whether the properties are improved or unimproved. It is a rule that real property in the United States and real property outside the United States are not like-kind properties. This exchange provides a means for the sale of a property with the proceeds going to a qualified intermediary who then holds the funds until the replacement property if ready to be purchased. A qualified intermediary (also known as an accommodator) is a person or entity that holds the funds received from the sale of the relinquished property, until the replacement property is purchased, thereby ensuring that the rules under section 1031 are abided by.
This exchange makes way for the deferment of Federal, and in most cases state, capital gain and depreciation recapture taxes. Stocks, bonds, loans, partnership interests, personal residences, and certificates of trust do not qualify. The due date of the tax return for the year in which the property was relinquished or the day that is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange is the time limit allowed for a transaction.
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A 1031 tax-deferred exchange provides strong benefits that can be translated into investment savings. It can potentially increase cash flow, eliminate day-to-day property management, and defer taxes. These transactions can be done successfully through reputed firms like 1031 Exchange Options or through the websites.
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