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GITDEC | 1031 Exchange Tutorial |
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Q and A: FAQ's Glossary 1031 Exchange Basics: How and Why 1031: 1031 Documents: Samples: Corporate Information: Ask us about 1031 Company Information Webmaster |
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In developing this tutorial article, our desire is to create a brief synopsis of the
fundamentals involved with Tax Deferred Exchanges. Where possible, we will paraphrase
directly from the Like-Kind Exchange Regulations issued by the United States Department of
the Treasury. However, in cases where the Regulations are considered incomplete or
inapplicable, we will seek to isolate those standards or practices which active tax
professionals and facilitators consider common and appropriate across the country.
Also, in compiling an effort of this type, remember that for brevity, it was necessary for us to deal only with those issues arising out of the most common exchange scenarios. Therefore, we have deliberately left out certain obscure exchange nuances or extenuating circumstances in an effort to focus on exchanging basics. In perusing the article, please keep in mind this caveat: Exchanging can sometimes involve complicated legal and tax issues. The failure to comply with applicable Like-Kind Exchange Regulations can jeopardize the potential tax deferred status of your transaction. When considering an exchange, seek out the counsel of a qualified legal, tax or exchanging professional. Advise them of the facts and circumstances of your proposed transaction and secure the services of a recognized and respected exchange facilitator. What is a Tax Deferred Exchange? A tax-deferred exchange represents a strategic method for selling one qualifying property and the subsequent acquisition of another qualifying property within a specific time frame. Although the logistics of selling one property and buying another are virtually identical to any standard sale and purchase scenario, an exchange is different because the entire transaction is memorialized as an exchange and not a sale. And it is this distinction between exchanging and not simply selling and buying, which ultimately allows the taxpayer to qualify for deferred gain treatment. So essentially, sales are taxable and exchanges are not. Internal Revenue Code, Section 1031 Because exchanging represents an IRS recognized approach to the deferral of capital gain taxes, it is important for us to appreciate the components and intent underlying such a tax deferred or tax free transaction. It is within Section 1031 of the Internal Revenue Code that we find the core essentials necessary for a successful exchange. Additionally, it is within the Like-Kind Exchange Regulations, previously issued by The Department of the Treasury, that we find the specific interpretation of the IRS and the generally accepted standards and rules for completing a qualifying transaction. Throughout the remainder this booklet we will be identifying these rules and requirements, although it is important to note that the Regulations are not the law. They simply reflect the interpretation of the law (Section 1031) by the Internal Revenue Service. Why Exchange? Any property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20%-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70%-80% of what it did previously. The below diagram illustrates the benefits of exchanging versus selling:
For more details on why you may want to consider a 1031 exchange, please review Why do a 1031? |
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