How Does 1031 Work?

If you are one of those who plan to sell your property, and utilize the proceeds of the sale for some other purposes, there is a tax liability that you are bound to incur. This is called the Capital gains tax. This is a method to ensure that anybody who sells of their property shall re-invest the amount back into real estate sector. Section 1031 of internal revenue is a law which works on these principles.

Section 1031 of internal revenue states that if an asset is sold and the ngains generated are used to buy another like wise asset, no gains are recognized, thereby implying that no tax shall have to be paid.

Section 1031 is a three step process which has to be completed within one hundred and eighty days. It is popularly known as 1031 exchange.

Step one involves sale of the property. The funds generated out of the sale are transferred to an authorized intermediary who shall hold these funds. A qualified intermediary is one who is authorized by IRS to hold these funds and facilitate 1031 exchange. This is to ensure that the seller does not utilize these funds for any other process.

Step two, which involves identification of property for purchase, has top be completed within forty five days of sale of first property. It is always advisable to shortlist atleast two to three properties of your choice, so that even if your initial choice does not materialize, you still have options to fall back on and you do end up paying the gains tax.

Step three is the most important and one where you have to proceed with caution, so as not to lose out on the opportunity. This is where you need to do the actual purchase of the replacement property, and the entire process has to be completed within 180 days of the sale of the first property. The intermediary shall pay out the closing costs and you will receive the title deed. Remember that the value of the replacement property should be equal to or higher than the value of the property sold initially. Only then can you defer your gains taxes. In case you have opted to buy a property with multiple owners, then it is prudent that you take the advice of tenant-in-common experts before finalizing the deal.

1031 exchange professional are available in the real estate market to help you work out good replacement deals and defer taxes. These professionals are knowledgeable about various aspects of the IRS code and can offer customized solutions.

With so much of cash being utilized in the real estate market, it is a good idea to defer taxes, as this amount can further be used to fuel the ever growing demand for real estate.