The 1031 Tax Exchange - An Interest-Free Loan From the U.S. Government
By: Ravok Corp | Posted: 22nd February 2008
A 1031 tax exchange is a technique commonly used by real estate investors in order to indefinitely defer tax liability on the sale of a property. This is achieved by relinquishing the rights to a piece of property one plans on selling to an intermediary, who then holds the proceeds from its sale and uses them to buy a replacement in compliance with the rules set out in Section 1031 of US tax code.
Although the present interest in the 1031 may lead one to believe that Section 1031 is a recent development, this is not actually true. Actually, the 1031's history stretches as far back as 1921, though at its conception, it was quite different from the 1031 exchange investors know and love. Section 1031 really came into its own in the 1970s, which saw many important changes in the way in which exchanges were conducted. These changes paved the way to a more powerful conception of the 1031 process and also generated increased interest among property investors.
The indefinite capital gains tax deferral an exchange provides to the investor might, at first glance, appear to be a kind of gift from the government, but it is, in reality, closer to an interest free loan, because there is an expectation that the taxpayer will repay the funds gained from the tax deferral by accepting capital gains liability on the eventual sale of a replacement property. Additionally, this interest free loan is one that may be kept indefinitely; an investor may elect to conduct any number of 1031 exchanges before ultimately make an outright sale, on which the investor must pay capital gains taxes.
Section 1031 of US tax code constitutes a mutually advantageous agreement between the investor and the United States government, profitable for the U.S. economy as a whole in addition to the individual investor. By viewing the transfer of value in an exchange as an extension of a preexisting investment instead of as a separate transaction liable for taxation, investors are given the opportunity to move their money to the best possible investments. This, in turn, helps to elevate the economy by bolstering the growth of new jobs.
Like anything else, the 1031 exchange has its detractors. Some advocates of change in Section 1031 will pose the argument that the tax free income provided to the investor in a 1031 exchange lends them an unreasonable advantage over other buyers. Another common issue of concern is that the strict time limits attached to some aspects of the exchange procedure could promote an atmosphere of frantic buying, resulting in an increase in asking prices for replacement properties. The aforementioned complaints, however, are only tenuously linked to reality, and the odds that Section 1031 will go through any significant change in the coming years are quite low. When looking at the big picture, most will agree that Section 1031 is greatly helpful to all parties , as it allows investors increased profits on the sale of property while also promoting the creation of jobs and therefore the greater good of the U.S. as a whole. Little doubt exists that the 1031 tax exchange is destined to be a part of the investment world for years to come.
Section 1031 Exchange (Of The IRC) States That Property Investors Can Use A 1031 Property Exchange When Selling And Buying Like Kind Investment Property. To Find Out More Visit http://www.Top1031Exchange.com
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Tags: expectation, first glance, proceeds, tax liability, united states government, individual investor, real estate investors, 1031 exchange, compliance, property investors, capital gains tax, taxation, 1970s, capital gains taxes, tax deferral, interest free loan