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1031 Property Exchange
Internal Revenue Code 1031 Tax Deferred Exchange
IRS Code 1031 allows for an investor of real property
to defer his capital gain upon the exchange of investment property
of a like kind. In other words, you can trade an existing property
for a new property or properties without having to pay taxes
on your gain. The tax liability is deferred into the new property(ies).
In plain English: If you own an investment property (real estate
of any kind) which has served its purpose and you would like
to upgrade to a newer, more profitable property, a 1031 Exchange
is of interest to you. Let's say you own a rental property which
you purchased in 1990 for $100,000. Now you found a better property
which could give you more rental income or a better return.
But due to appreciation, your old property has gone up in value
and is now valued at $150,000. Under normal circumstances you
would need to pay taxes on your capital gain when you sell the
old investment property.
Not so if you do a 1031 Tax Deferred Exchange. You do not pay
capital gain at the time of sale, but you defer the capital
gain. The advantage is that you can use your $50,000 in capital
gain to purchase a more expensive property. And of course if
you upgrade to a more expensive investment property you should
get a much better return on your investment than on your old
investment property.
In short, the advantage of a 1031 Exchange is that you can
defer your capital gain until the end of your life, as long
as you do not sell your investment property. And you can do
multiple 1031 exchanges over the years and keep deferring your
capital gain until you either pass away or finally sell your
investments and do not continue buying other investment properties.
Interested? Good, because this is a great opportunity for real
estate investors to trade in their old income producing properties
for newer, more profitable income properties without having
to pay taxes on their capital gain (they defer).
But there are plenty of things you need to know
and obey in order to defer your capital gain. A 1031 Property
Exchange should be handled by professionals. If you don't want
to spend big bucks to have an attorney prepare that for you
then get a professional Real Estate Agent who knows how to handle
1031 Exchanges. Have a real estate agent sell your old property
and have him find a new, more profitable one.
Delayed or Deferred Exchange
Simultaneous Exchange
Reverse Exchange
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