Section 1031 And Investment Property
Section 1031 of the Internal Revenue Code affords the investor with the opportunity to avoid for a time the payment of capital gains taxes while reinvesting his money into a better or larger property with the potential of a larger gain at the time of sale. This is accomplished though a procedure referred to as “property exchange.” In order to qualify for the benefits offered by Section 1031, an investor must retain the services of an experience real estate attorney or another real estate professional that is well-versed in the nuances and complications of the IRS tax code. This will, in the end, help prevent headaches and costly mistakes that could result if the investor attempts this venture on his own and does not understand the particulars of 1031 investment property.
Qualifying for Section 1031 deferment is not difficult, nor is finding 1031 investment property. First, after the investor has chosen which 1031 investment property or properties he wants to divest, the next step is to hire a qualified intermediary, usually an individual or an firm. The qualified intermediary is vital in the entire process, as he is the party who conducts all of the transactions, from receiving the payment for the sold or exchanged property, to forwarding that payment to the appropriate party for the newly-acquired property. Among the many duties entrusted to the qualified intermediary is the preparation and overseeing of all documents considered pertinent to the deal. The investor must inform the qualified intermediary of his choice or choices of 1031 investment property, as well as his choice of replacement 1031 investment property. The investor may choose more than one replacement property as long as the Section 1031 stipulations are met. These stipulations state that the property or properties be of like-kind, meaning they are commercial use or investment properties and not personal properties or primary residences. Also stated in Section 1031 is the requirement that the value of the replacement 1031 investment property be equal to or higher than the cost of the original exchanged property. The exchange must be completed within 45 days after the sale of the original property, and the entire deal must be completed within 180 days. The Internal Revenue Code is strict, and extensions or exceptions are rarely granted for any reason.
It is extremely important for the investor to demonstrate that this is an exchange of 1031 investment property and not a sale, as this is the point of the Section 1031 tax deferment. The idea is that there will be no profit to tax since the investor has technically not received funds; he has simply exchanged one property for another property. Section 1031 allows the investor many of these transactions without limitation. The Internal Revenue Code is a useful tool for investors of any experience level wishing to reinvest funds in 1031 investment property and avoid the immediate payment of capital gains taxes, and is well worth investigating on a deeper level, especially with the advice and guidance of a professional in the field.
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