The Internal Revenue Code, Title 26, Section 1031 states the following: “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.” This sentence is the basis of the 1031 exchange, a handy tool for people who are selling property but would like to defer paying capital gains taxes. Although the taxes are only deferred (you won’t be getting off tax-free), there are still many 1031 exchange benefits. Scroll down to learn more.
1031 Exchange Benefits
1. You can defer capital gain taxes. First, the obvious: when you set up a 1031 exchange, you’re allowed to defer paying capital gain taxes on the sale of your business, trade, or investment property. So long as you reinvest in a replacement property, you aren’t gaining money and so you aren’t (yet) required to pay taxes. You can continue on with 1031 exchanges as you buy/sell multiple investment properties, but if you ever sell without reinvesting in a like-kind property, you will have to pay the taxes. Unless you pass away, that is . . . 2. If you pass away and never sell the replacement property, your beneficiary should be able to avoid paying taxes on the property. That’s right! If you hold out long enough and choose not to sell the replacement property, it will be given to the beneficiary you specify in your estate plan. In most cases, the beneficiary will be able to realize a “step-up” in the cost basis of the property, virtually eliminating the original tax burden. 3. You can reinvest 100% of your equity. It’s an obvious benefit, but it deserves to be stated. If you aren’t paying taxes after a sale, you can take all of the equity gained to invest in your new property. This extra leverage can be a great advantage. With your increased funds, you can purchase a larger or more impressive property. 4. You can maximize your investment’s cash flow and minimize management responsibilities. Let’s say that you own property that produces no income whatsoever (for example, a plot of land). If you sell that property and purchase a new property with a sizable income (for example, a shopping mall), you can greatly increase your cash flow without having to pay any taxes on the sale. Or maybe, instead of cash flow you’re concerned about a property with high-maintenance management. You could sell your high-maintenance property, purchase land that requires virtually no management, and never pay taxes on the sale.
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Are you interested in setting up a 1031 exchange? If so, we highly recommend that you work with a seasoned professional to ensure you follow the IRS’s many rules, regulations, and deadlines. If you live in southwest Missouri, contact Parks & Jones, Attorneys at Law. We can guide and engage you as legal counsel as you begin the 1031 process. Give us a call at 417-823-9898 or click here to schedule a free consultation. We would be happy to help.