1031 Tax

2007-03-08 10:33:40

( Financial )



The 1031 tax-deferred exchange or 1031 tax grants investors the right to defer tax on capital gains from the exchange of like-kind properties. The 1031 tax is considered a very powerful tax tool for investors and realtors alike.

The 1031 tax indicates that taxpayers do not have to pay income tax stemming from the sale of property. This 1031 tax deferred exchange is applicable provided they invest again the money coming from the sale in comparable or like-kind property.

Aside from investors and realtors, this 1031 tax benefits lawyers, escrow and closing agents, lending agents, real estate advisers or counselors, real estate accountants, and a lot more.

Hence, in 1031 tax exchange, you get to save money because the income you will be getting from selling a property will not be charged with federal income tax. Again, you should remember the provision that the income should be invested again in like-kind property.

You have to be aware of the disadvantages of the 1031 tax too. One of which is the depreciation in the appraisal of the value of the replacement property. This became so because the tax rate is computed based on the purchase price of the replacement property after the gain was deducted. This gain from the sale of the relinquished property coming from the exchange was tax-deferred.

This tax deferred income will later on be taxed if the investor decides to cash out of the investment.

There is a category under which property can be exchanged or not in 1031 tax or 1031 exchange. The property allowed in the 1031 tax refers to real estate which is under the investor’s name. However, a personal residence or a property purchased for the purpose of reselling is not covered under the 1031 tax.

In a 1031 exchange, the property to be exchanged should be comparable or of like-kind property. This means that property which is improved or not improved and which is used for business or investment is covered under the 1031 tax.


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