1031 Exchanges - Part 1
1031 Exchanges - Part 1
The tax deferment advantage of this type of transaction has made the 1031 product popular in certain transactions. The 1031 program does not allow the use for primary residences, however in commercial or investment property transactions, there can be a definitive advantage. In all cases it is wise to consult your tax accountant and your attorney to advise you of the potential benefits, or if in fact there is a benefit, in relation to the cost of use of this process.
By deferring the capital gains tax in this process you effectively receive an interest free loan from the government in the amount you would have paid in taxes which has the same effect as increasing your equity in the transaction.
There must be at least two properties involved in the process, one you are selling (the “Relinquished Property”) and one you are purchasing. (The “Replacement Property”) They must be of “like kind”, such as in a trade or business a warehouse, office building, industrial space, etc., or for investment, raw land, rental property, apartment building. These properties are all like kind and they can be interchangeable in the 1031 process. Property that you own for personal use or vacation home does not qualify for a 1031 exchange.
The replacement property must be equal to or greater than the relinquished property in value, and the sale equity must be reinvested in the replacement property. In some cases you can re-invest a portion of the proceeds and take the balance in cash, however you will be taxed on the portion you take as cash.
There are other rules and requirements that must be met in order to make a 1031 Tax Deferred exchange meet the IRS requirements, which I will explain in a future Title Tip.
Benchmark Title acts as a “Qualified Intermediary” in order to assist you in this process, call our office for further information, or tune in next week for more on the “1031 Tax Deferred Exchange” process.
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