Deconstructing 1031 Exchanges
1031 Exchanges are a tax deferral method by which a property owner may trade one property for another without having to pay federal income taxes on the transaction.
In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in a 1031 Exchange, some or all of the tax on the transaction is deferred until some time in the future, usually until the newly acquired property is sold.
How 1031 Exchanges Happen
1031 Exchanges are authorized under Section 1031 of the Internal Revenue Code IRC §1031 and the related regulations. When an exchange is conducted in accordance with IRC §1031, the tax on the gain which is realized by virtue of the sale of the old property will be deferred, (not recognized) until such time as the property acquired in the exchange is sold or otherwise disposed of in a taxable transaction. In order to be 100% tax deferred the taxpayer must sell something equal in value and use all of the proceeds in the sale.
1031 Exchange Synonyms
1031 Exchanges are referred to in a variety of ways. The most common terms you will hear are:
- Authority IRC 1031
- Method to Defer Tax on Profit [Gain]
- Tax Deferred Exchange
- Interest Free Government Loan
What Makes a Transaction Not Taxable?
The taxpayer may avoid the taxable sale and purchase and qualify for a 1031 Exchange if, prior to the sale of the old property, the taxpayer enters into an exchange agreement with a “Qualified Intermediary,” a fourth-party principal who helps to ensure that the exchange is structured properly and meets all of the requirements of IRC §1031 and the regulations and pursuant to the Exchange agreement, assigns all of his/her rights in and to the sale agreement to the Intermediary.
Taking advantage of a 1031 Exchange
does NOT have to be complicated when you partner with the qualified intermediaries at the Exchange Authority, the leading experts in our field. We’ll patiently walk you through your options for taking full advantage of this tax deferral opportunity.