There are many types of 1031 Exchanges. Depending on the type of transaction, a 1031 Exchange can take a completely different form when it comes to property transfer. Take a look at these guidelines below to help gain a better idea of the fundamentals:
What are the benefits?
A Section 1031 Exchange is one of the rare techniques available to postpone or possibly eliminate taxes due to the sale of qualifying properties. By having the ability to defer this tax, this opens the door for investing money in other properties. Due to this, you can receive an interest free loan from the government; equal to amount that you would have paid in taxes. Next, you then have the freedom to reallocate your investment portfolio without pay tax on any properties that you may gain or dispose of.
So many types of exhanges?
To make it simpler to understand, we can break down the different types of exchanges:
- Simultaneous Exchange: The exchange of the property given up occurs at the same time that the other property is gained.
- Delayed Exchange: With this type of exchange, there is a lapse of time that takes places between the transfer of the relinquished property and the addition of the replacement property. Treasury Regulations include strict time limits when it comes to this type of exchange.
- Reverse Exchange: This occurs when the replacement property is acquired before the transfer process of the relinquished property takes place. The IRS outlines a safe method for reverse exchanges.
- Personal Property Exchange: In addition to commercial property, personal property can also be exchanged in a similar manner.
What items are needed for a valid exchange?
In order to participate in a valid exchange, the property must be a qualifying property, have a proper purpose, must be of like-kind and must have an exchange requirement. So, what does this all mean? A qualifying property is a property is any property not specifically excluded from Section 1301. Some examples that are excluded include property held for primary sale and inventories. Both properties, the property being relinquished and the one being replaced must be used for proper production purposes. When it comes to like kind, this essentially means that the property must be of similarity to one another. All property that qualifies is like kind in the United States. Venture outside of U.S. territory and this changes. Lastly, all exchanged property must be exchanged for some other property.
What do you need to know in order to defer taxes incurred?
The value, equity and debt of the property being replaced must be of equal or greater value to the relinquished property
The total of the proceeds from the sale of the relinquished property must be used towards the acquisition of the replacement property.
For more information on 1031 Exchanges in the greater Houston area, contact Greenberg Company at 713.778.0900.