What Is A 1031 Tax Deferred Exchange?
In its simplest terms a 1031 Tax Deferred Exchange is a method of deferring the capital gains tax paid by an investor as real property is purchased and sold. The tax code permits a taxpayer to exchange property held for a productive use in a trade, business or as an investment for a property of a like-kind without recognizing income, therefore delaying taxes.
One of the best reasons for using this tool is by deferring the tax you are able to reinvest all the cash and equity. This opens the door to many options: property with higher revenues, relocation of investment properties, higher appreciation, increased or decreased actual properties as suits. Essentially, it allows the investor to craft their business in a manner that suits them best.
Are They All The Same?
There are several types of exchanges that can be used, each being beneficial in specific circumstances: Forward Exchanges, Reverse Exchange, Vacation/Personal Home Conversion, Simultaneous & Delayed Exchanges. Which Exchange applies varies in each situation, and we can help you assess what is best for you.
What Does A Qualified Intermediary Do?
A Qualified Intermediary is a required part of every exchange. McFerran Law will work with you (the Exchangor), buyers, sellers, financial advisors, accountants, title, escrow and real estate professionals.
We will help you assess which exchange is best for you; we will review documentation and coordinate the transaction to meet the strict deadlines that must be followed for the exchange to be considered valid in the eyes of the IRS. At the end of your exchange, we’ll provide an accounting and summary for your tax return.
- Exchanges must be completed within specific timeline, or capital gains tax is reinstated.
- A Qualified Intermediary is required to ensure Exchangor does not have control over sale proceeds during the exchange.
- Exchange Agreements must be in place between correct parties on strict timelines.
- Cash from an exchange can only be withdrawn at 4 limited times during the exchange.
- Like-Kind Property means “productive” investment real property rather than stocks and bonds, and not property to be held only for resale.