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Hate paying unnecessary capital gains taxes? Flex your 1031 Exchange Option
No one likes paying capital gains taxes. Especially when it's not necessary. A smart real estate investor is more than familiar with the 1031 exchange option. Under Section 1031 of the Internal Revenue Code, a 1031 exchange program allows an investor to defer paying capital gains and depreciation recapture taxes by reinvesting all of the proceeds of a sale of investment property into a new replacement property of like-kind or greater value.
Why the 1031 Exchange Program is so popular:
- Investors utilize the 1031 exchange option as an essential part of their real estate investment strategy because it gives their real estate investments more flexibility and the ability to retain as much capital as possible.
- Investors are able to maximize the liquidity of their real estate investments by selling properties when they have realized the maximum return on investment without having to wait to select another property to purchase in which they have all of the added responsibilities of management and ownership.
Requirements of entering into a 1031 Exchange Agreement:
The IRS has strict requirements for a real estate investor to legally defer paying capital gains taxes. The following is a list of the essential requirements.
- 100% Reinvestment: To satisfy the 1031 exchange agreement a real estate investor must reinvest all of the proceeds from the sale of the relinquished investment property into a new replacement property of like-kind or greater value.
- Title Requirements: The investor must hold title in the identical form as held in the relinquished investment property to defer capital gains taxes with the 1031 exchange option.
- Time Requirements: In order to fulfill the requirements of a 1031 agreement an investor must identify three potential replacement properties within 45 days from the close of the relinquished investment property. The investor must close on the exchange property within 180 days. These deadlines are absolute and the 1031 option ceases to exist if an investor doesn't strictly comply with theses deadlines.
- Qualified Intermediary: The IRS mandates that an investor use a Qualified Intermediary to conduct the 1031 exchange transaction. The Qualified Intermediary must be an independent agent of the investor, so an accountant, attorney, broker or employee may not conduct the transaction.
The abovementioned are merely the essential requirements for successful satisfying the requirements of a 1031 Exchange Agreement. As with anything relating to taxes, you should consult with your tax specialist or accountant to clarify your understanding about all of the tax implications and requirements of the 1031 Exchange Program.
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