Real Estate Investing Guide for Beginners: IRS
Code Section 1031 to Defer Capital Gains
by Jeanette Joy Fisher
If you've been contemplating selling an investment
property and acquiring a new one, you owe it to
yourself to investigate Internal Revenue Code
Section 1031. Using the guidelines set forward in
Section 1031 to do a Tax Deferred Exchange will
allow you to legally defer any capital gains tax
when you exchange your current property for a
"like-kind" new one.
It's a nice incentive for encouraging real estate
investors to continue investing. Here's how it
works. In essence, IRS code Section 1031 allows
investors in various kinds of real estate to trade
their investment properties tax-free for new ones,
as long as the new investment qualifies as a
like-kind piece of real estate. The IRS rules are
designed to allow investors to continue to be
involved in the real estate investment field while
increasing their leverage and avoiding the sting
of what can be heavy capital gains taxes.
There are only certain types of investment
properties that will qualify for like-kind real
estate exchanges under the terms of IRS code
Section 1031. Those properties include apartment
buildings, rental houses, retail or commercial
properties, raw land, office or industrial
buildings, and ranches. There are many types of
properties stipulated in Section 1031 that don't
qualify for tax deferred exchanges, including
personal residences, property owned by dealers,
interests in partnerships, and business inventory.
There are as many reasons why someone might want
to exchange one investment property for another as
there are investors. For instance, it's possible
that your depreciation allowance on your current
property may soon be expiring. Using a 1031 Tax
Deferred Exchange would allow you to exchange your
old property for another one of equal or greater
value and then to begin claiming depreciation on
your new property.
If your initial capital was limited when you began
your investment career, it's possible that your
equity position in several relatively small
investment properties has increased considerably
over the years. If you'd like to consolidate your
real estate investments into one larger or
higher-quality property, a 1031 Exchange may be
just the ticket.
The same would be true if you were contemplating a
move to a new area that would make it inconvenient
to continue owning and maintaining your current
investment property. A 1031 Exchange would make it
possible for you to obtain an investment property
in your new location without incurring any capital
gains liability.
Regardless of your reason for wanting to move on
to a new investment property, you'll find a 1031
Tax Deferred Exchange to be helpful in avoiding
capital gains on your old property. The amount of
money you can save can often be considerable,
depending upon how long you've owned your current
investment property. It’s well worth looking into.
The rules contained in Section 1031 are strict and
inflexible, and must be followed to the letter in
order to make the exchange completely within the
law. Therefore, it's important for you to check
with your tax consultant or financial advisor to
learn the advantages, timelines, and particulars
for your situation.
Copyright © 2006 Jeanette J. Fisher
Jeanette Fisher, college instructor, teaches
interior design psychology and real estate
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Guide for Beginners:
1031 Tax Exchange
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