1031 Exchanges-R-us

Why I.R.C. 1031 makes financial sense

As an investment real estate owner, you’ve worked hard to build equity in your real estate property, reaping unique rewards from the bricks and mortar or from working the land. But when it comes time to harvest the value you’ve created, how much does the prospect of paying taxes on the sale discourage you from selling your property? Fortunately, Section 1031 of the Internal Revenue Code offers you a powerful solution.

More about why 1031 makes financial sense

1031 Simple Truths

The payment of income or capital gain tax on the sale of an investment/income producing property is voluntary thanks to Section 1031 of the Internal Revenue Code which quite often is the most underutilized section of the tax code.

Perhaps the problem lies with calling the procedure an Exchange as this creates a lot of misunderstanding and would be better utilized if it was re-labeled as a 1031 Rollover because that is precisely what happens. The gain is rolled over to a new property. There are an unlimited number of times an Exchanger can successfully rollover gain and postpone tax. The ultimate goal is to make this tax disappear by one of two ways:

1. Exchangers may successfully rollover gain and ultimately move into one of their investment properties and declare it to be their primary residence.

2. Capital gains taxes are eliminated upon the date of death of the property owner and their heirs receive a step up in basis to fair market property value. This simply means heirs can sell the property for its date of death value and not pay tax.

The History of The 1031 Exchange

Section 1031 of the Internal Revenue Code (I.R.C.), which provides this tax break, has been in existence since 1924. Initially, it was designed to provide relief to property owners who were swapping or simultaneously trading properties straight across the table with each other.

The theory was that since the nature of the investment for both owners was not changing as a result of the transaction, it should be treated as a tax neutral event. While this worked well for the two owners who found each other, that situation was rare. If the trade was not straight across the table, the IRS disallowed this special treatment.

In the 1970s, a series of court cases introduced a new element in the history of exchanges, – the possibility of a delayed exchange rather than a simultaneous exchange.

Bruce A Ford - Qualified Intermediary Exchange Accommodator