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IRC Section 1031 Exchange allows investors to defer capital gains taxes on the exchange of like-kind properties that provides great advantages for investors.

When selling business or investment property, tax on the gain at the time of sales is required. However, Section 1031 provides an exception and allows you to postpone the tax on gain IF you reinvest the proceeds in a qualified like-kind exchange. Following are some pros and cons of Section 1031 Exchange:

Pros

1. Deferral of Taxes

The deferred taxes can be significant, especially with a low adjusted cost basis of the new property. It is an invaluable advantage in exchanging business or investment property. 

2. Increased Cash Flow for Reinvestment

The investor will have more cash available and better leverage for reinvestment due to tax-deferred. 

3. Wealth and Asset Accumulation Tool

By continually performing 1031 exchange, the investors can benefit from significant cash flow and net worth increases. In theory, one may exchange into numerous investment properties over the years and pass the investment on to their children at the time of their passing. 

Cons

1. Strict IRS rules and regulations

Both properties must be held for use in a trade or business or for investment and be similar enough to qualify as “like-kind.”  Two time limits of Section 1031 Exchange includes: 1) 45 days from the date of selling the relinquished property to identify potential replacement properties; 2) The replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. Not strictly adhering to the regulations, it may disqualify the exchange or cause penalties. 

2. Future Increase in Tax Rates

The higher capital gains rates may be recognized when selling the investment property in the future. 

3. Only Tax Deferred, Not Tax Free

Keep in mind that Section 1031 Exchange is a tax-deferred transaction, not tax-free.

When considering Section 1031 Exchange, please consult professional or refer to IRS publications listed below.

References/Related Topics

• Publication 544, Sales and Other Dispositions of Assets
• Form 8824, Like-Kind Exchanges (PDF)
• Form 4797, Sales of Business Property

Source: IRS / Huffington Post 

If you are looking for 1031 Exchange properties, please contact Jan Kish at 281-808-9321 or tigerrealtor@gmail.com.

With over 26 years of experiences in Residential & Commercial Real Estate, Jan Kish successfully helps Buyers and Sellers achieve their dreams. Her level of expertise is a great asset to her clients. Through her passion and professional network, Jan Kish is confident to be your Real Estate Consultant for life. Click HERE for more details.

Despite a short downturn due to the oil slump and winter weather, Houston’s housing market continued to improve in April as the homebuying season began to heat up.

All metrics increased year over year in April, with single-family home sales increasing 1.9 percent to 6,502 and total property sales increasing 1.5 percent to 7,907, the Houston Association of Realtor reported May 13. Total pending sales were up a whopping 39.8 percent year over year to 6,717.

And more sellers entered the market, pushing inventory up to a 2.9-month supply — the highest since September. That’s up 9.6 percent from the 2.6-month supply Houston recorded in April 2014 and still well below the national supply of 4.6 months of inventory. Months of inventory is an estimate of the time it would take to deplete the current active housing inventory based on the previous 12 months of sales.

Despite the increase in inventory, prices still reached record highs for an April in Houston. The average sales price of a single-family home increased 4.3 percent year over year to $281,724, and the median price jumped 7 percent to $209,790.

Total dollar volume for all property sales increased 6 percent year over year to nearly $2.1 billion. Sales of homes between $250,000 and $499,999 increased 9.9 percent, sales of homes between $150,000 and $249,999 increased 9.7 percent and those at $500,000 and above increased 4.8 percent. Sales in other price segments decreased.

Source: Houston Business Journal

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