1031 Tax Deferred “Like Kind” Exchanges
Wouldn’t it be great if you could exchange a property you don’t want with one you find much more desirable? Wouldn’t it be even better if it offered tax advantages too? Both are possible with a 1031 tax deferred exchange as defined by the IRS. It may be the solution you need to get the property you want!
The 16th Amendment to the Constitution gave Congress the power to levy a tax on personal income. It was ratified in 1913. Eight years later in the Revenue Act of 1921 the first tax-deferred exchange was enacted.
The original idea came from Farmers who swapped, or “exchanged” farmland for farmland with one another. No fuss, no muss and no taxes. You still can swap land like this too. The only problem is finding someone who wants to swap with you.
But the IRS allows for what it calls a Differed exchange. This will, “allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.“
Loosely translated, you can sell your property and take the proceeds and re-invest in a new property. An actual swap does not necessarily have to take place. But how does this differ from just selling one property and buying another?
According to the IRS, with a 1031 exchange it, “allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange”. The spirit and intent of swapping land for land is kept although in reality you sell one property and buy another.
There are stipulations to a 1031. The property you want to get must be of “like kind”, or similar to yours. For example you can’t exchange a personal residence for a business. The IRS defines it this way, “Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.“
There is a time factor for 1031 exchanges. You have 45 days after the sale of your property to identify (in writing) the property you want to buy. Once identified you have 180 days in which to purchase said property. Taking possession of any proceeds or gain during a tax differed exchange will disqualify you for the tax deferment. A facilitator or qualified intermediary is needed.
Inner Banks Living has a lot of experience with 1031 Tax Differed “Like Kind” Exchanges. Although we are not a facilitator, we do work with several qualified intermediaries. Contact us today for more information about 1031’s and to see if this is an option suited for you.
For more information go to the Internal Revenue Service’s website: www.IRS.gov
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