What is a 1031?1031 Tax Exchange
The real estate market has recently boomed and along with it more and more opportunities for successful and sound negotiations. While 1031 Tax Exchanges are not new, they are gaining more exposure thanks in part to the real estate industry. As more and more real estate transactions are motivated by investment and business, real estate professionals have discovered the need to be knowledgeable in 1031 Tax Exchanges, especially how they can be of benefit to real estate investors. A 1031, by the way, is a section number contained in the Internal Revenue Code, often just referred to as IRC 1031.
A 1031 exchange, otherwise known as a tax deferred exchange is a simple strategy and method for selling one property, that’s qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. The logistics and process of selling a property and then buying another property are practically identical to any standardized sale and buying situation, a “1031 exchange” is unique because the entire transaction is treated as an exchange and not just as a simple sale. It is this difference between “exchanging” and not simply buying and selling which, in the end, allows the taxpayer(s) to qualify for a deferred gain treatment. So to say it in simple terms, sales are taxable with the IRS and 1031 exchanges are not. US CODE: Title 26, §1031. Exchange of Property Held for Productive Use or Investment
Qualifying for a 1031 Tax Exchange
Not everyone who buys or sells real estate is in a position to reap the benefits of a 1031. There are some specifics involved. You will likely see the phrase “like-kind” associated with 1031s. This means that the property involved must be similar, in legal terms,– personal property or real property– and it must be used for business purposes. What constitutes “business?”
• property used for rental purposes
• a business site
• a home-based business
A personal residence only qualifies under a 1031 Exchange if a business owner runs a business out of a home-based office.
The Tax Advantages of a 1031 Exchange
The tax advantages of a 1031 Tax Exchange are attractive for those who qualify. When you sell a piece of real estate that qualifies under the 1031 Tax Code, you are able to “rollover” the profit earned into the purchase of another “like-kind” property while deferring the payment of capital gains taxes. This in no way means that you are exempt from the taxes, but it helps secure your assets while you are exchanging like-kind property.
Further stipulations apply: for instance a property must cost more than that which is being sold or exchanged in order to meet the criteria of a 1031 like-kind Exchange.
The professional that specializes in managing a 1031 property Exchange is called a Qualified Intermediary. Be aware that the paperwork involved in an IRC 1031 is tedious and must be managed properly to qualify according to IRS requirements. This is the job of an Intermediary, a specialist in this type of transaction. If you are considering an IRC 1031, contact a tax advisor first to make sure your property interests qualify.
The Role of Your Real Estate Agent in a 1031 Exchange
You will still need the real estate expertise of a REALTOR®, even if you think you qualify for a 1031. Your REALTOR® will guide you in locating the property you are looking to buy and she will ask you the appropriate questions to determine if you qualify for a 1031 like-kind Exchange. Once both of these have been discovered, she will help you contact a Qualified Intermediary who will lead you through the legalities of a 1031 Exchange. It is important that an experienced attorney or professional handle the Exchange because the IRS requires time-sensitive transactions and appropriately filed paperwork.