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Benefits of 1031 Exchanges – The Underutilized Tax Code!
- 1031 Exchange, otherwise known as an IRC §1031 Tax Deferred Exchange, is an underutilized tax code. Most individuals simply don’t know about them or how they work! This blog post describes the benefits of 1031 Exchanges.
As the leading qualified intermediaries for 1031 Exchanges at the Exchange Authority based in Leominster, MA, we realize that individuals need to be more educated on the benefits of 1031 Tax Deferred Exchange. This article explains the tax code in a way that makes this highly attractive tax deferral opportunity understandable and obtainable for all.
Defining the term “Exchange”
Understanding the word exchange within the context of the law is central to understanding §1031 exchanges. An exchange is a deferral mechanism for tax dollars to a different property or asset. The ultimate goal for the client is a tax deferment or postponement. Essentially, individuals don’t end one investment and start a new one. Instead, individuals continue their original investment by investing in a new property within a fixed transactional period of 180 days.
1031 Exchange Common Terms
Individuals contemplating a 1031 Exchange will hear two tax technical terms a lot. They are:
Relinquished property
The relinquished property in a 1031 Exchange is the old property or asset that an individual is selling.
Replacement Property
The replacement property in a 1031 Exchange is the new property or asset that an individual is buying.
3 Simple Features of 1031 Exchanges
- Primary residences can not be utilized in a 1031 Exchange. Why? Because taxpayers already have an exemption on the gain under tax code section 121.
- 1031 Exchanges can occur between related parties. For example, a taxpayer may sell a property to a related party and buy from the related party. 1031 Exchanges between related parties requires a 2 year holding period for both parties. Both parties need to be engaged in an exchange to qualify.
- The location of properties featured in an exchange matter. For example, an exchange must be within the 50 United States and US Virgin Islands. Properties located outside the United States are candidates for exchanges as long as the relinquished property and the replacement property are outside the U.S.. For example, properties outside the United States can qualify. So, your rental villa in France can be exchanged for a rental villa in Italy.
On the surface, §1031 Exchanges can seem a bit daunting. But when you partner with the qualified intermediaries at the Exchange Authority, you are in the best of hands. Read more on what makes a transaction taxable or non taxable here: 1031 Exchanges.
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