An Overview Of The 1031 Tax Free Exchange
Law
A number of books and literature on 1031 tax free exchange have
been available for a long, long time. Nowadays, such
information is also available online in the worldwide web. This
law permits people having a “useful” property to sell them and
purchase a new property of similar type and equal or greater
value. In a valid transaction the law allows deferment of tax
payable on the sale value of property sold. This type of
exchange benefits businesses and individuals to get more
property value. However, if rules stipulated are not followed
to the letter, the consequences are costly. This aspect can be
overcome with the help of professionals called qualified
intermediaries.
1031 tax free
exchange is so named because IRS (Internal Revenue Service)
explains this law under section 1031. This law allows only tax
deferment and not tax avoidance. However, it is possible to
avoid paying any taxes on this property if the last buyer does
not sell this with profit as a motive and this situation will
make this as a tax free exchange. The taxes that are being
discussed are on the initially sold property which generates
taxable income. Using 1031 tax free exchange laws one can defer
tax payment.
The 1031 tax free exchange
law talks about selling of useful property. One cannot sell
his residential house where he is living and this is not
considered as useful property. However, in case this property
is an apartment building or has a loan of 30 years, it is
considered as useful property. Properties that also come under
the “useful property” classification are business buildings,
parcels of land, apartment buildings, machinery, vessels, and
planes. Although vehicles are not listed in this category, they
have been included in the explanation of useful property
thereby making them eligible for inclusion in the common tax
free exchange.
Since the tax amount is deferred, one can make higher
down payment using this
deferred tax amount and also get higher loans for purchase
since his down payment is higher. This becomes an advantage
because better property could be purchased using higher amount.
On large value items such as buildings, land, machinery etc.
these things make a lot of difference in amount.
Although this looks very attractive, one must be aware of
the pitfalls. Such benefits also come with tags attached. The
main problem is that a lot of legal obligations have to be
fulfilled for getting this concession and this too in a limited
period. Applications have to be made using forms specified in
IRS document and sent to concerned personnel. The money should
neither be held with the buyer or seller. Any mishandling in
any of the areas will have negative impact. In such a case, the
IRS will step in and stop the 1031 tax free exchange and tax
the profits of the initial property. All these can be
overcome by outsourcing the whole process to qualified
professionals.
|