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.
You are not also allowed to hold on to those capital gains for as long as you want. You have exactly 120 days from the day you sold your property to find a new property and put it under contract for acquisition. You must also purchase that property under contract within the time allowed for you to avail the benefit of 1031 exchange. There's no extension allowed for these days and you cannot use the money to purchase a property for your own personal use.
A lawyer or an intermediary such as a 1031 service company is also needed to facilitate the process. Hiring the service of these people is also another condition to qualify for 1031 exchange. These people will facilitate the papers and the contracts involved in the process. For instance, the intermediary is tasked to handle the capital gain for your, purchase the exchange property, and transfer the ownership to you.
Your papers must also state clearly that you want the sale and the purchase of the exchange property to cover the privilege under section 1031 of the tax law. Your intermediaries are tasks to ensure that your contracts clearly state your intention. This is part of their job, which by the way you are going to pay them for.
The IRS has five types of 1031 exchange available such as the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common in real estate investing is the delayed type, which is the one, explained in this article. It is called the delayed type because there's a time delay allowed from the sale of the property to the purchase of the exchange property.
The number one benefit of applying for 1031 exchange is that you could postpone your capital gains tax payment. You'll only pay until you make the final sale of your property or if you can't find a property to exchange within the time allowed - this is highly unlikely. In the times when investors need to cut costs as much as possible, availing for a 1031 exchange is really a big help.
This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply. No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.
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.
You are not also allowed to hold on to those capital gains for as long as you want. You have exactly 120 days from the day you sold your property to find a new property and put it under contract for acquisition. You must also purchase that property under contract within the time allowed for you to avail the benefit of 1031 exchange. There's no extension allowed for these days and you cannot use the money to purchase a property for your own personal use.
A lawyer or an intermediary such as a 1031 service company is also needed to facilitate the process. Hiring the service of these people is also another condition to qualify for 1031 exchange. These people will facilitate the papers and the contracts involved in the process. For instance, the intermediary is tasked to handle the capital gain for your, purchase the exchange property, and transfer the ownership to you.
Your papers must also state clearly that you want the sale and the purchase of the exchange property to cover the privilege under section 1031 of the tax law. Your intermediaries are tasks to ensure that your contracts clearly state your intention. This is part of their job, which by the way you are going to pay them for.
The IRS has five types of 1031 exchange available such as the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common in real estate investing is the delayed type, which is the one, explained in this article. It is called the delayed type because there's a time delay allowed from the sale of the property to the purchase of the exchange property.
The number one benefit of applying for 1031 exchange is that you could postpone your capital gains tax payment. You'll only pay until you make the final sale of your property or if you can't find a property to exchange within the time allowed - this is highly unlikely. In the times when investors need to cut costs as much as possible, availing for a 1031 exchange is really a big help.
This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply. No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.
About the Author:
About the author: Jacques Coquerel is a real estate investor based in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course.
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