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1031 Exchanges - Good For Investors, Good For the U.S. (Track This Article)

A 1031 exchange is a method often used by real estate investors to indefinitely defer tax liability on the sale of a property. This is achieved by giving the rights to a property that one plans on selling to an intermediary, who holds on to the funds gained from the sale of the relinquished property and uses them to purchase a replacement property in compliance with the rules set out in Section 1031 .

Although the current interest in the 1031 might lead you to believe that it only recently came on the scene, this is untrue. As a matter of fact, the history of the 1031 extends all the way back to 1921, although at its conception, it was quite different than what we today think of as an exchange. Section 1031 really came into its own in the 1970s, which saw a host of important modifications in the manner in which these exchanges were regulated. These modifications paved the way to a farther-reaching conception of the exchange process and also created increased interest among property investors.

The indefinite capital gains deferral Section 1031 provides to the investor may, at first, seem to be a gift from the US government, but it is, in reality, closer to an interest-free loan. This is because there is an expectation that the investor will “repay” the extra money gained from the capital gains tax deferral by paying capital gains taxes upon the eventual sale of a replacement property. In addition, this “interest-free loan” may be kept by the investor indefinitely; an investor can elect to conduct any number of exchanges before finally make an outright sale, on which taxpayer must pay taxes.

The 1031 exchange exists as a mutually advantageous arrangement between the investor and the U.S. government, profiting the country's economy as a whole in addition to the individual investor. By looking upon the transfer of money in an exchange as a continuation of a preexisting investment rather than as a discrete transaction liable to be taxed, investors gain the opportunity to transfer their money into the best possible investments. This, in turn, boosts the U.S. economy by bolstering the growth of new jobs.

As with anything, the 1031 exchange has its skeptics. Some advocates of change in Section 1031 will argue that the tax free income gained by to the investor in a 1031 represents an unfair advantage. Another frequent issue of concern is that the stringency of the time limits attached to steps in the exchange process may promote a frantic rate of buying, with a resultant increase in the cost of replacement properties. These criticisms, however, are only tenuously linked to reality, and the odds that the 1031 exchange will see significant changes in the coming years are low. In general, most will concede that Section 1031 is immensely helpful to all involved, allowing investors increased profits on the sale of property while also encouraging the creation of jobs and therefore the greater good of the country. There is no reason to doubt that the 1031 is destined to be a part of the property investment business for decades to come.

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Section 1031 Exchange (Of The IRC) States That Property Investors Can Use A 1031 Property Exchange When Selling And Buying Like Kind Investment Property. To Find Out More Visit www.Top1031Exchange.com

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