What is a 1031 Exchange?
One comes across terminologies such as 1031 exchange, tax deferrals etc at the time of researching for
purchasing a new home. At this time he will start asking questions such as ""what is a 1031 exchange and do I
qualify?”. Answers for this question are available in abundance if one looks for it. This article makes an attempt
to briefly answer these questions. Although this article will educate the interested reader on this type of
exchange this is not exhaustive and the interested person has to consult 1031 experts in this field to get detailed
answers.
Details about the 1031 exchange basics and requirements can be got from a 1031 exchange specialist working in
IRS section. He can also advise on whether the property a person owns will qualify for 1031 exchange sale and
purchases and also tax deferral. One can find these specialists in any of the real estate companies working for
1031 exchange companied. You also may find certain freelancers doing this consultancy job although their scale of
operation will be small.
There are varied types of 1031 exchanges and one has to finally choose as per his requirement after analyzing
the functional specialties of such exchanges. All these exchanges are involved in the process of selling existing
property and purchasing like-kind properties of same or higher value without immediate payment of taxes. These
properties can be of varied kind such as real estate, machinery, livestock etc. However, the transactions can be of
properties which are similar in nature. For example, Real estate cannot be exchanged for properties other than real
estate. Similar condition is applicable for other types of properties also
Once the basic principle is understood it is easy to proceed further in this process. There are different types
of exchanges available. The function of a normal 1031 exchange is to sell existing property first and use the
complete sale amount for purchase of a new property of same or higher value. In this the profits are not posted in
the persons account. Further, the taxes are deferred to another far off date or indefinitely. In the reverse 1031
exchange purchase of property is executed before the sale of existing property. Another type of exchange is that of
purchasing at a lower value than the sale value to payoff the existing loan on property to avoid any default. The
1031 exchange also covers trade in cattle, ships, manufacturing equipment, automobile etc. in addition to real
estate. Many persons are not aware that this trade also is covered in exchange law.
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