1031 Tax-Deferred Exchanges
Is a 1031 Tax-Deferred Exchange right for you? Let’s talk about your options.
A 1031 Tax-Deferred Exchange is an investment strategy that should be considered by anyone who owns investment real estate. A 1031 Exchange is only valid on investment property.
These exchanges are sometimes called tax–free exchanges because the exchange transaction itself is not taxed. The IRS’s regulations make exchanging easy, inexpensive and safe.
At Coolidge Realty, our real estate experts can help you sort through this real estate ownership opportunity to see if it’s right for you.
What is a 1031 Tax-Deferred Exchange?
A 1031 tax–deferred exchange is simply a method by which a property owner trades one property for another without having to pay any federal income taxes on the transaction.
In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the capital gains tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.
|Taxes on Gains||$96,000||– 0 –|
What’s the difference between a Tax-Deferred Exchange and Starker Exchange?
None. 1031 Tax-Deferred Exchanges are also commonly known as Starker Exchanges, named after a 1979 court decision. In fact, these types of real estate exchanges are also known as Delayed Exchange, Like-Kind Exchange, 1031 Exchange, Section 1031 Exchange, Tax-Free Exchange, Nontaxable Exchange, and Real Property Exchange. Despite the many names, these terms all refer to a tax-deferred exchange.
What are the advantages of a 1031 tax-free exchange?
The primary advantage of a tax–deferred exchange is that you, as a taxpayer, may dispose of property without incurring any immediate tax liability. This allows you to keep the earning power of the deferred tax dollars working for him or her in another investment.
In effect, this money can be considered an interest–free loan from the IRS!
Before deciding whether or not to engage in an exchange, you need to carefully analyze all of your options. A decision should NOT be based solely on the tax consequences of the transaction. Rather, business considerations should play the dominant role in the decision. Such business decisions may include:
- Consolidate or diversify investments;
- Obtain greater appreciation on the real property;
- Increase cash flow;
- Relocate a business investment;
- Transfer into (or out of) a high basis (or low basis) property;
- Eliminate management problems.
Can you benefit from a Tax-Deferred Exchange? Let Coolidge Realty help!
The purpose of this section is to bring attention to the opportunities available in engaging in a tax–deferred exchange as an investment strategy. The application of Section 1031 to a particular transaction or property can only be determined after careful study of your own particular facts and circumstances, and analysis by your tax advisor, attorney, real estate agent and intermediary.