1031 Exchange

Introduction To The IRS 1031 Exchange Rules

One of the best clauses of Internal Revenue Code of the United States is 1031. If you are aware of the proper IRS 1031 Exchange Rules, you can easily save a lot of money which you would have otherwise paid as tax. Actually it is not a loophole. The Internal Revenue Service encourages you to take advantage of provisions of this clause. If you understand the clauses properly, you stand in a very advantageous position.

The concept behind IRS1031 is that if you are an investor in real estate, you are allowed to postpone the payment of your capital gains tax and depreciation recapture taxes. This can continue until you sell out the said property according to applicable regulations. It is a great gift to the real estate investors who make frequent modifications to their portfolio. They do not have to bear the excessive amount of capital gains tax that they would become subject to in case, this provision is not in place.

The concept of IRS 1031 exchange means that you can purchase a new property within a period of 180 days of selling your old property. In such case you are allowed to carry forward the amount you saved from capital gains tax. In simple terms, your tax deferment carries on provided you purchase a new property within 180 days of the old property on which you were taking said tax deferment. It is something like a cushioning period while you transition between the old and new properties.

Naturally this is a legal and tax related matter. It is advised that you should take the assistance of a tax attorney in this regard. The tax attorney would assist you in finding a Qualified Intermediary. Such an intermediary performs almost all of the IRS 1031 transactions. The Qualified Intermediary can a be any eligible person as long as he is not your lawyer, accountant or contractual broker. The Qualified Intermediary takes funds from you and moves them to the closing agent of the deal.

Apart from getting the transactions done through a qualified intermediary, you must be careful of the time limits that are involved, you must observe the time limits that are imposed by IRS 1031 exchange rules. The investor is required to earmark three potential properties in a period of 45 days from the sale of original property. Furthermore the purchase process must be completed within 180 days. Purchase must be done from any of the properties that have been marked.

Finally the IRS 1031 exchange rules also require you to make complete investment of the money procured from the sale of original product. Failing this you would not be eligible for the tax benefits that are provided.