A 1031 exchange is known as a like-kind exchange and can be an effective tool for those who have investment real estate. When selling investment real estate, most people face a significant tax burden. A like-kind exchange can significantly reduce or even eliminate this burden, by deferring a capital gains tax which might otherwise arise at the time of the sale of investment property.
The 1031 Exchange Rule
Property can only qualify for a like kind exchange if the taxpayer follows specific rules as laid out by the US tax code. Investment properties can only be exchanged for properties that are another investment. For example, you cannot trade a business property for a residential property unless the residential property is going to generate income. One or more rental condominiums can, though, be exchanged for a multi-family home. The second (and perhaps most often violated) rule for a 1031 exchange is how the proceeds of the sale are handled. For example, you cannot take the proceeds from one sale and buy or pay off another property you own. This type of transaction will result in all proceeds being taxable. And very important, neither the taxpayer nor his or her representatives (attorneys and accountants included) can handle the proceeds during the exchange. The funds must be handled by a qualified intermediary. [Read more...]