How to Gain from the 1031 Exchange
Posted on December 21, 2009
Filed Under Taxes | Leave a Comment
The Starker Exchange Trust, or the 1031 exchange as it is also called, can be used by an investor who wishes to sell some of their investment property but they do not want to pay taxes on it. The 1031 exchange real estate deal will allow the seller to defer the taxes if they purchase another property that is the same price as the one they want to sell. Of course, there are strict rules regarding this exchange.
If you own a company or investment property, then you may be able to gain from this trade and quite likely save quite a bit of money, simply by exchanging assets rather than than selling them. A “like kind” exchange under the IRS 1031 Exchange applies to personal belongings and real estate and may save you both state and federal taxes, anywhere from around 15 to 36% per dollar gained, according to your particular state’s tax rate.
In order to take advantage of this you must use a Qualified Intermediary (QI) to facilitate your exchange in order to satisfy the Internal Revenue Service’s requirements of a valid 1031 exchange. This also works to your advantage as using a trained QI will help ensure that the exchange is approved by the IRS. Their involvement includes participating on behalf of the taxpayer by buying and selling the assets and holding the funds for the taxpayer.
When the sale of your property has gone through, you will have 45 days to declare the potential replacement business or property that is the 1031 like kind exchange of the property that was sold. Fortunately, all real estate is considered “like kind” so you can trade an office building for land, and the like. Once approved, you have to obtain your like kind property within 180 days from the date you sold your other property. So as to put off 100% of the taxes from the sale, you need to meet two requirements with the new property; first you have to purchase a property that’s of equal or greater value than your original property. Then you will need to use 100% of the net proceeds from the other property to obtain the new property.
In order to be in compliance with the 1031 rules, the last step is to be sure that the person who sells the property is the same one who buys the property. If the real estate that you sold was titled to you individually, then the new property will have to be titled to you as well. In order to be sure the 1031 exchange is approved the same holds true if the original property was titled to a corporation or partnership; the new property has to be titled to the same corporation or partnership.
The 1031 exchange is normally used by an individual who wants to sell one of their investment properties but does not wish to pay taxes on the transaction. The 1031 tax deferred exchange will allow the seller to defer the taxes if they purchase another property that costs the same.
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