| Section 1031 of the Internal Revenue Code (IRC) | | | | · Further in order to have a cent percent tax |
| defines the 1031 exchange. 1031 exchange also known | | | | deferment on the disposition of property, there are |
| as Like kind exchange specifies that if an asset that is | | | | three basic steps to be followed. Firstly right after the |
| most often a land or a building, is sold and the | | | | sale of the original or relinquished property, it is |
| proceeds of the sale are then reinvested in a similar | | | | necessary to acquire a replacement property as early |
| type of asset then there is no gain or loss and the | | | | as possible. The replacement property must be equal |
| capital gains taxes are deferred. | | | | to or greater than the value of the relinquished |
| A 1031 exchange is an ideal way to suspend the taxes | | | | property. Secondly those who wish to have 100% |
| that are immediately due after the first sale. For | | | | capital tax deferment must reinvest all of their net |
| instance if an investor purchases a residential property | | | | equity from the surrendered property in the |
| for say $250,000 and sells it for $30,000 after 5 years, | | | | replacement property. Finally one must assume debt |
| the profit of $50,000 which he incurs will be subject to | | | | on their replacement property that is equal to or |
| capital tax. But if the profit so accrued is invested in | | | | greater than the debt on the original property. In case |
| another similar kind of commercial real estate, there will | | | | the debt on your replacement property is less than the |
| be no taxation on it. So his taxes will be deferred to | | | | debt on your original property then people seeking |
| some date in future. | | | | complete capital tax suspension should put in additional |
| 1031 exchange is a source to save your money being | | | | cash to balance the exchange transaction. |
| spent in capital taxes, but on the same hand an | | | | · There are certain rules to identify an adequate |
| individual should be careful and keep few points in mind | | | | replacement property. For instance according to the |
| before entering this exchange. | | | | three-property rule you may identify up to three |
| · Before entering the 1031 exchange, whether as | | | | replacement properties overlooking their fair market |
| an investor or a seller it is better to do a little research | | | | value. You may not purchase all the identified |
| and consult your tax advisor to get an estimate on | | | | properties but it is best to have alternatives in hand. |
| your tax exposure. | | | | While under the 200 percent rule you are allowed to |
| · Several assets such as boats, horses or cattle | | | | identify more than three replacement properties only |
| etc. qualify for the 1031 exchange but on the same | | | | on the condition that the fair market value of these |
| hand only real estate can be exchanged for a real | | | | properties does not cross 200 percent of the contract |
| estate. So the real estate should be an investment | | | | price of the property sold. In the 95 percent rule if the |
| property. A building purchased for renovations and | | | | fair market value of more than three identified |
| selling and land purchased for construction of houses | | | | properties exceeds 200 percent of the value of the |
| etc. cannot qualify for 1031 exchange because in such | | | | original property, the exchange can still hold id the 95 |
| instances the owner does not intend to hold on to | | | | percent of the total cost of all the properties on the list |
| them for a period of time for investment reasons. | | | | are purchased. |