1031 Tax Deferred

One of the least understood tax relief provisions of the Internal Revenue Code is the tax-deferred exchange under Section 1031 of the IRC. Although the tax shelter days are basically gone for real estate investors, and the passive loss regulations work against them, the tax deferred exchange lives on as a viable and excellent alternative to defer income taxes upon the sale of real estate.

Properly structured tax-deferred exchanges can defer significant gain and the corresponding tax liabilities. Tax-deferred exchanges under Section 1031 of the IRS allow taxpayers a reasonable period of time in which to complete a tax-deferred transaction.

One of the least understood tax relief provisions of the Internal Revenue Code (IRC) is the tax-deferred exchange under Section 1031 of the IRC. Although the tax shelter days are basically gone for real estate investors, and the passive loss regulations work against them, the tax-deferred exchange lives on as a viable and excellent alternative to defer income taxes upon the sale of real estate.

An exchange is broadly defined as a reciprocal transfer of real property that has certain tax advantages over a sale. Definite procedures must be followed in order to qualify the transfer as an exchange.

The choice of a tax-deferred exchange affords the seller/taxpayer an exceptional opportunity upon selling the property. A tax-deferred exchange can best be defined as a sale without immediate tax implications with a window to replace the property with like-kind property and reduce the basis of the replacement property by the deferred gain, thereby deferring the tax to a future date.

Included here is a series of questions and answers that will help explain how tax-deferred exchanges work:

WHAT IS THE DIFFERENCE BETWEEN A SIMULTANEOUS EXCHANGE AND A DEFERRED EXCHANGE?

Once the provisions of the tax-deferred exchange are understood, the process is perhaps more mechanical and form oriented. The misconception of tax-deferred exchanges lies with the thought and confusion that properties must be "swapped" simultaneously.

For example, property owner "A" wishes to exchange an office building with property owner "B" who is looking to sell an office building. If both parties agree to exchange their properties, they have entered into a simultaneous exchange. In reality, the simultaneous exchange rarely occurs because of the complications of the identifying process, the timing, and establishing values.

A tax-deferred exchange, however, affords the seller a time frame in which to sell the property ("the relinquished property"); seek other property ("the replacement property"); and comply with the provisions of Section 1031 of the IRC.

In essence, a deferred exchange can qualify for deferral of taxable gain under Section 1031 of the IRC even if there is a time frame between the seller's transfer of the relinquished property and the purchase of the replacement property.

As a result of the time parameters and the available options for selecting the replacement property, the tax-deferred exchange is one of the few remaining tax shelters for real estate owners and investors.

1031 Tax |