WHAT IS A TAX DEFERRED EXCHANGE? (1031) Exchange: A tax deferred exchange is simply a method by which a property owner trades (sells) one property for another without having to pay any federal income taxes on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But with an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold. These exchanges are sometimes called “tax free exchanges,” because the exchange transaction itself is not taxed.
1031 BENEFITS: Deferral of Taxes: Taxpayers can build wealth through a reinvestment of profits and appreciation in market value, while at the same time avoiding having the current payment of taxes erode their wealth.
|Example||Sell & Pay Tax||Sell & Purchase|
|Proceeds of Sell||$1,000,000||$1,000,000|
|Cash to reinvest||$800,000||$1,000,000|
|New investment with 20% down||$4,000,000||$5,000,000|
|10% income on investment||$400,000||$500,000|
|Compare||$100,000 or 25% more income|
ADDITIONAL GOOD REASONS FOR YOU TO CONSIDER A 1031 EXCHANGE:
-Greater leverage (instead of paying the tax on the gain of the sale, you can reinvest the tax money)
-Increase cash flow
-Own income property instead of raw land
-Geographic relocation of owner or property
-Reduce management required
-Freedom of joint ownership
-Relocation of a business Estate planning ��� dividing/consolidation properties – ease estate problems for future
-Improve from low appreciation to high growth
QUALIFIED PROPERTIES: To meet the requirements of 1031, both Relinquished Property and Replacement Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind.
LIKE-KIND PROPERTY: Like-kind refers to you use of the property and not to its greater quality “1031” property may be mixed as to type and still be like-kind, for instance, you may exchange land for a duplex, or a commercial building for a retail store, etc.
QUALIFIED INTERMEDIARY: A qualified intermediary is a person (or company) who, for a fee, acts to facilitate the deferred exchange by entering into an agreement with you for the exchange of properties.