What are 1031 exchanges?

Under normal circumstances, when you sell an investment property, you owe a property tax on the gain. Taking depreciation deductions for tax purposes causes gain or you may experience again if the property appreciates in value during its ownership. A section 1031, named for the Internal Revenue Code Section it refers to, allows an exemption to the capital gains tax. When you sell your business or investment real estate, replace it with a different business or investment real estate, and complete an exchange, you can defer payments of the capital gains tax normally required on the sales. If your plans include using the money from the sale of a business or investment property to buy more of the same, 1031 exchange provides greater proceeds for your next investment- more than you could gain through their recent investment of after-tax proceeds. A 1031 exchange is not a tax loophole. It is a section of the Internal Revenue Code, written by Congress, to allow anyone who meets all the requirements to sell their property and defer paying taxes on the gain. Also, you have to hold the property for a year and a day to have it recognized as an investment property. Otherwise, you are a dealer and have to pay capital gains tax. So 1031 exchanges do not usually work on “fix and flip” properties. With 1031 exchanges, you cannot have control of the proceeds received from the sale of the old property. By law, all money is held by a qualified intermediary. You cannot have an associate or another employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the second home is purchased. You have 45 days from the date of closing on the old property to identify a list of properties, for which you will purchase the new property