1031 Exchange - A Way to Save your Taxes

by Amelia Jones 1031 property expert,Tax Consultant

1031 exchange came into the function or got its individuality from the section 1031 of the IRC (Internal Revenue Code). This exchange is used as a tool for deferring the capital gain taxes. Under the 1031 exchange the investor is allowed to sell the property and the proceeds received from the sale of relinquished property is reinvested to buy a new replacement property. The deferral strategy of 1031 exchange can be duplicated by any number of exchanges until the tax liability crosses into the individual’s estate death.

1031 Exchange in depth

1031 Exchange allows the investors to manage the real estate investments along with maintaining the equities, diversifying portfolios, and gaining tax advantages. To facilitate the investors with completing their 1031 exchanges on time, companies providing the 1031 exchanges should maintain a database of the investment properties suitable for 1031 exchanges.

Access to nationwide database provides potential advantages to real estate investors. For example, an investor wants to variegate geographically and get into a growing real technique would only be finding the right property to invest in there within the 1031 deadlines.

Under 1031 exchange, the QI (Qualified Intermediary) holds the exchange fund on behalf of the investor. The agreement of sale of the replacement property is assigned back to the Seller, which allows the deposit to be withdrawn from an exchange account. The assignment is introduced when the Agreement of Sale is signed. However, it can be approved anytime by the Seller to get the deposit funded from the exchange account. If because of some reason, the assignment is not signed by the Seller, your broker should provide written notification of the assignment and have it presented to the Seller. The notification includes a compliance clause guaranteeing the Seller that the 1031 exchange will not impact the Seller in any manner. The assignment helps to get solutions to any issues with constructive receipt of the exchange funds.

However, in 1031 exchange the investor has the opportunity to reinvest in one or more than one replacement property, for that he needs to meet one of the following rules as discussed below:

To get the full benefit of the rule we should replace the property with equal or higher value.

1. The Three-Property Rule: The three-property rule allows the investor to identify up to three replacement properties. The investor does not need to buy all the three properties only the value of the relinquished and replacement property must be equal.

2. The 200% rule: Under the 200% rule of the 1031 exchange the investor is allowed to identify unlimited replacement of the property but its value must not exceed 200% of the total value of the relinquished property.

3. The 95% rule: The 95% rule is the rule in which you are allowed to identify as many properties as you want unless and until you acquire properties valued at 95% of their total value or more.

1031 Exchange enables the investors money to get the full benefit for you. However, the exchange process is very difficult in nature and it would be good to seek guidance from expert professionals.