1031 Tax Law

The laws surrounding the 1031 property exchange are simple but they are very strict. They are also written in very technical language and a difficult for the lay person to understand.

The various rules and regulations can be broken down into lay person terms, making them easier to understand. This understanding will also allow people to make knowledgeable decisions regarding whether or not to engage in a tax deferred exchange.

There are several reasons that a person would consider a tax deferred exchange. Some of these reasons may include:

* They may have some real property investments, such as raw land, that are non income producing. In other words they do not give the person any cash flow. In a tax deferred exchange, the person could take this non income producing property and exchange it for property that is income producing. This may be in the form of a rental home or apartment complex. This would not only bring about a cash flow from the investment, but it would also afford income tax deductions to the seller, many of which were not available for the raw land.

* This is a way to rebuild equity by disposing of properties that the person has been holding a long time after the appreciation of the property has topped out and get new properties.

* If the person owns property that is located in an area that is experiencing economic depression or other types of deterioration, then it is wise to dispose of these properties that are quickly going downhill and trade them for properties that are in a better location.

* If the person owns rental properties and those properties need extensive repair or maintenance, or they have problem tenants, then they can sell the properties and get other similar properties that do not have has many problems or need as many repairs. A bonus to this is that it can also give the seller an increasing in appreciation.

* If a person plans to sell real property and want to reinvest in more income or investment property, then a tax deferred exchange is a good way to go. To sell and then reinvest will incur income taxes on the realized gain. On the flip side, if the transaction becomes an exchange, then the seller pays no taxes on the sale. This will leave more money to be used in acquiring more properties.

* Good real estate planning will allow a person to continue to exchange properties throughout their lifetime. This can also spill over into their heirs as they will not be required to pay income taxes on the gains of the property.

* A tax deferred exchange can help a person conserve their equity on their property because they are not required to pay taxes on their net profits.

When a person sells real property that is designated for an investment or business, then they have a significant amount on income tax that must be paid on it. It does not matter if nearly all of the money from the sale of the initial property is reinvested into more real property, the seller is still required to pay just about the same amount in income taxes. This is where a tax deferred exchange can be very beneficial.

1031 Tax |