Section 1031 Tax Deferred Exchange Defined
Tax deferred exchanging is an investment strategy that should be considered by anyone
who owns investment real estate. Anyone involved with advising or counseling real
estate investors, including real estate agents, lawyers, accountants, financial planners,
enrolled agents, tax advisors, escrow and closing agents, and lenders, should know about
tax deferred exchanging.
What is a Tax Deferred Exchange?
A tax deferred exchange is a simple method by which a property owner trades one
property for another without having to pay any federal income taxes on the transaction. In
an ordinary sale transaction, the property owner is taxed on any gain realized by the sale
of the property. But in an exchange, the tax on the transaction is deferred until some time
in the future, usually when the newly acquired property is sold.
These exchanges are sometimes called tax free exchanges,. because the exchange
transaction itself is not taxed. Tax deferred exchanges are authorized by Section 1031 of
the Internal Revenue Code. The requirements of Section 1031 and other sections must
be carefully met, but when an exchange is done properly, the tax on the transaction may
Real Estate Sales
- Investment Land
- Agriculture Land
- Investment Property
- Agriculture Land
In an exchange, a property owner simply disposes of one property and acquires another
property. The transaction must be structured in such a way that it is in fact an exchange of
one property for another, rather than the taxable sale of one property and the purchase of
another. Today, a sale and a reinvestment in a replacement property are converted into an
exchange by means of an exchange agreement and the services of a qualified
intermediary (QI) - a fourth party who helps to ensure that the exchange is structured
properly. The IRS’s regulations make exchanging easy, inexpensive, and safe.