|
What is the
purpose of a 1031 exchange?
A 1031 tax
deferred exchange allows you to roll-over all of the proceeds received from
the sale of an investment property into the purchase of one or more other
like-kind investment properties. At closing, proceeds are transferred to a
third party--called a facilitator or qualified intermediary--who holds them
until they are used acquire the new property.
Exchanges Allow
You to Delay Capital Gains Taxes
Capital gains
taxes are deferred if all of the exchange funds are used to purchase
like-kind investment property. The deferment is like getting an interest-free
loan on the tax dollars you would have owed for a cash sale. More equity is
retained, and that helps you move into properties of higher value each time
you perform a 1031 exchange.
What's
Eligible?
A 1031 exchange is
possible when you sell real estate held for investment purposes. It cannot be
used for the sale of your personal residence.
Like Kind
Properties
Exchanged
properties must be like kind. For a real estate exchange this means
real-property for real-property, but not necessarily land for land or a
rental house for another rental house. Take a look at the IRS rules for
specific information about what types of properties qualify as like kind.
You can
exchange a single property for multiple properties, or purchase one property
from the proceeds of several. Proceeds not used to purchase new investment
property are taxed as a cash sale.
"In a like-kind
exchange, both the property you give up and the property you receive must be
held by you for investment or for productive use in your trade or
business." -IRS
|
