Great Tax-Deferred Advantage for Inventors - Section 1031 Exchange6/20/2015
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:
- 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.
- Increased Cash Flow for Reinvestment
The investor will have more cash available and better leverage for reinvestment due to tax-deferred.
- 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.
- 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.
- Future Increase in Tax Rates
The higher capital gains rates may be recognized when selling the investment property in the future.
- 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.
- 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 firstname.lastname@example.org.
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