1031 Exchange and Real Estate Investment

The 1031 exchange rule was not there at the time of Benjamin Franklin. This is the reason that he believed in the inevitability death and taxes. While the death is certain, 1031 exchange rule can surely save you from taxes if you are doing real estate business.

The IRS

According to the Internal Revenue Code, Title 26, Section 1031, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

In this scenario, the like-kind property actually means other real estate. It doesn’t really mean that a deal must be based on land-for-land or office-for-office exchange.

It also means that if your property exchange qualifies for the 1031 exchange rule, you will either have no or limited tax to pay at the time of exchange. Good thing is that you can do 1031 for as many times as you get provided that you qualify for it. You may also be able to get profit on each swap. However, you will have to pay taxes if you are selling the property for cash.

Keep swapping

It means that you can actually sell an investment land to get an office rental property. The difference of price is going to be like a profit for the one giving high valued real estate. However, there are a few things that you need to keep in mind.

• Investor must be selling the investment property. This rule doesn’t apply on residential properties.
• The exchange should of the properties of like kind. It means that any other real estate can do.
• The exchange should be done by meeting certain deadlines and time frames.

Things you cannot do

There are certain restrictions for certain properties and scenarios here. There cannot be a 1031 exchange for:

• Properties that are held for resale and stocks in trade
• Bonds, notes and stocks
• Evidence of indebtedness
• Certificates of trusts

Government as your partner

If your property qualified for a 1031 exchange and you have taken care of all of the deadlines and time frames too, then you can grow your holdings by making government your partner. With an increase in the value of properties in business, you can trade for high valued rentals while avoiding taxes. This way, you will be able to plow the money into the next transaction instead of paying taxes from it.