Large and small real estate investors looking for tax relief from capital gains take advantage of the tax code commonly knows as a 1031 exchange. If an investor sells property they pay tax. Taxes are paid on capital gain, not equity or profit. However, property that qualifies for preferential treatment under Internal Revenue Code §1031 is treated quite differently.
“No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes is exchanged solely for property of a “like-kind.”
Investors often mistakenly believe they must acquire property “identical” to their relinquished property. They are surprised to learn a wide variety of properties can be considered “like-kind.” “Like-kind” does not refer to the nature, character or type of property. Instead, it addresses the intended use of the property. Provided the property is initially acquired and held for either business or investment purposes, it can qualify as a suitable replacement property under IRC Section 1031.
For example, any of the following can be considered “like-kind” property exchanges: a duplex for a commercial rental, bare land for a fourplex, a rental house for vacant land or an apartment building for an office building. Investors do not have to exchange for exactly the same type of property as relinquished; but it has to be for investment, not a personal residence.
The benefits of exchanging include using leverage to maximize your investment dollars to property diversification to allow you the widest range of investment freedom. 1031 Tax Deferral can range anywhere from a simple buy and sell of two properties to a complex, multi-leg, multi-property transaction involving a delayed, reverse or construction exchange. The investment strategy and the nature of the transaction will decide which exchange best suits your needs. Imagine selling rental property or land, acquiring new real estate of any type and deferring capital gain taxes. Thousands of investors are profiting every day simply by using the tax deferred sale IRC §1031!
There are many exchange service companies that make the process incredibly easy. Information supplied by Starker Services
