This Is An Exchange That Occurs When The Replacement Property Has Been Closed On Prior To The Selling Of The Relinquished Property

Category: Finance, Real Estate.

Real estate investors looking to sell an investment property and purchase a new one can greatly benefit from the Internal Revenue Code Section 103Section 1031 is one of the most powerful tax deferral tools currently available for taxpayers.

This means that taxpayers do not have to pay income taxes when they sell an investment property and reinvest the proceeds from that property into a like- kind or similar asset. In short, this section allows for a tax- deferred exchange. A 1031 Exchange comes with numerous advantages for taxpayers and paves a road of encouragement for real estate investors so that they might continue to invest. According to the IRS, like- kind properties must be the same in character or nature. First and foremost, Section 1031 gives the taxpayer the ability to sell business, investment and income property and not pay federal income taxes on it if they replace the sell with a like- kind property. They can, be different in, however quality or grade.

Properties that do not qualify under a 1031 Exchange are personal residences, business inventory, interests in partnerships, and property owned by dealers. Real estate investment properties that qualify under this IRS code include rental houses, retail and commercial properties, office and industrial, apartment buildings buildings, ranches and undeveloped land. While Section 1031 obviously presents a big perk for real estate investors, there is a disadvantage. There are four types of exchanges made possible through Section 103First, is a simultaneous exchange. Because the exchange reduces the basis for depreciation on the replacement property, the replacement property will then include a deferred gain that will be taxed in the future when the taxpayer sells his or her investment. This type of exchange occurs when the taxpayer closes both properties on the same day.

Second is a delayed exchange, also known as a" Starker Exchange. " This type of transaction refers to the closing of the replacement property after the closing of the relinquished property. This is usually a back- to- back transaction with no lapse of time between the closings. A delayed exchange does not take place on the same day. Next is the reverse exchange also known as the title- holding exchange. The delayed exchange is mandated by strict time frames pursuant to Section 103Specific timelines are in place to allow the taxpayer a certain amount of time to search for a replacement property and sign a contract to purchase it. This is an exchange that occurs when the replacement property has been closed on prior to the selling of the relinquished property. Lastly, is the improvement exchange which also serves a title- holding exchange.

When entering into this type of an exchange, the intermediary will retain the replacement property s title until the taxpayer closes the relinquished property. This type of exchange refers to a situation that involves the taxpayer purchasing property and arranging improvements for it before it is actually received as the replacement property. Once the improvements are complete the liaison then passes on the title to the taxpayer. Since Section 1031 does not allow the taxpayer to improve the property, a mediator is employed to retain and close on the title of the replacement property until it is ready to enter as an exchange. As you can see, there are several situations applicable to Section 1031 that benefit real estate investors. To learn more about IRS Code Section 1031 and how to profit from it, contact your financial advisor or accountant.

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