Anyone selling, buying or constructing real estate should
look into the benefits of the 1031 Property Exchange. This offers
both federal and state tax advantages to investment or business
property exchanges for other like-kind property. What’s
a like-kind property? According to the IRS, its any property:
“of the same nature or character, even if they differ
in grade or quality. Personal properties of a like class are
like-kind properties.” Basically, a taxpayer cannot exchange
a strip mall for an apartment building.
What does this mean to the average real estate investor or
Realtor? 1031 Exchanges help you defer capital gains taxes on
your property sale. This exchange is limited, however, to real
estate investing, trade or business use. The replacement property
must have a value and net equity equal to or greater than that
of the relinquished property.
Keep in mind that you can’t actually access proceeds
from your sales transactions at closing. Instead, these funds
are held for you in an escrow fund. Within 45 days, you must
identify one to three replacement properties. The total market
value of the identified real estate must be less than twice
the value of the relinquished property. Following property identification,
you’ll need to make a purchase within 180 days. To the
average buyer, this is a comfortable amount of time to select
a worthwhile trade.
The 1031 Property Exchange has its monetary benefits. But
ensure your process includes a qualified intermediary and specialized
real estate attorney to adhere to IRS standards. The federal
government will not allow a real estate broker, relative, attorney
or accountant as monetary intermediary, or as the party holding
property funds in escrow.
To learn more about the 1031 Property Exchanges
and its unique tax benefits to you, consult with a qualified
tax professional.
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What
is a 1031 Property Exchange?
