What 1031 Exchange Means?

1031 Exchange is a mechanism of putting off of the payment of taxes for many years, which is most known and favourite by the American investors. It consists that the seller of business-real estate (not primary residence, vacation or second home) can sell it and buy new, not paying capital gain tax and recapture of depreciation if he observes laws.

What are the rules for 1031 Exchange?  The Price of the bought real estate and the credit for its purchase should be equal or to exceed the cost of the sold real estate.

The Seller has no access to money; they are stored at the third party till the moment of purchase of the new real estate. The new real estate should be found within 45 days and its purchase should take place within 180 days after the sale of the old real estate (or before delivery of the tax declaration for a year of sale).

The rules seem simple enough however they demand precise execution.

In what cases are people usually use 1031 Exchange? The first case is for purchase of more dear real estate. The second case is for change of the character or territorial moving of the investments. Also for diversification or on the contrary, for consolidation of an investment portfolio, as well as for division of property of partnership or joint venture.

Except for that there is an opportunity to reverse exchange when you first buy a new real estate, and only after that sell the existing. In this case the observance of the rules will be in return. Usually this opportunity is used at occurrence of very good bargain, when the desirable object still should be constructed or when the transaction on sale was broke, and the desirable object for purchase is already found.

Thus, while you continue to reinvest the profits in the real estate, instead of to withdraw them from there, you may not pay the capital gain tax and recapture of depreciation though all life you will continue to increase the riches. And your successors should not pay these taxes, owing to the stepped-up basis.

 

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