1031 Tax Deferred Exchanges

A 1031 tax deferred exchange is a real estate tool approved by the U.S. government provide a tax shelter to real estate investors to encourage them to reinvest in real estate. It is used by real estate owners to postpone payment of the capital gains tax and to reinvest the money in like-kind real estate where it can be used to leverage a new real estate purchase that can continue to generate revenue or asset.

Under a fully qualified Section 1031 exchange, an investor trades real estate for other like-kind real estate and all of the capital gains taxes are deferred until the investor sells the newly acquired real estate in a taxable transaction. The underlying philosophy of deferring capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate.

The savings in current taxes due enable the taxpayer to use those dollars to purchase more equity in the acquired property or to acquire other real estate investments while using the dollars that are owed for capitol gains tax as capitol towards other like-kind real estate investments.

1031 Tax Deferred Exchanges can add significantly to an investors ROI. However, there are stringent rules that must be followed to the tax shelter can be disallowed. These types of exchanges should not be attempted without appropriate advice from an attorney or tax professional that is knowledgeable and experienced with 1031 trades.

In addition, there is a timing aspect to the sale of the old property and the purchase of the new property associated with a 1031 Exchange.

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