The 1031 Exchange Program

The 1031 tax exchange is a common tactic that is used by investors of real estate so that they can defer tax liability when they sell a property. In this exchange the investor will transfer the rights of the property to an intermediary that will hold the funds from the sale of said property. The intermediary will hold the money until the investor is able to find a replacement property that fulfills the regulations that are stated in Section 1031. Below we will look at the origins of the 1031 exchange and how it helps investors and the government. Do you know  how is capital gains tax calculated ? Click here for info. 

Although there has been recent interest in the 1031 tax exchange and Section 1031, these are not new developments by any means. Although the original concept of the 1031's was quite a bit different then they are today, the history dates back to the early 1920's. The manner in which exchanges were conducted saw a lot of modifications over the years but the modern 1031 Exchange came into its own in the 1970's. The modifications that were made resulted in a more powerful exchange process, the new exchange is also what really brought real estate investors into the mix.  Check out this infographic for more great tips!

The capital gains tax deferral that one gets from the exchange program might be looked at as a gift from the government, when in reality it is more like an interest free loan. This is because the taxpayer is expected to pay any extra funds that are gained from the deferral by accepting liability of the replacement property. Investors can continue to use the exchange program as long as they wish, they will only pay the capital gains tax once they decide to sell their property outright.

You might be reading this and thinking that the 1031 exchange is only a good thing for the investor, in reality this program is good for the government as well. The country's economy will benefit from this as well as the taxpayer. People will be able to transfer their money into the investment that they think is best for them.

As with many laws and things that government does, the 1031 exchange has its skeptics. Many of the skeptics think that Section 1031 should be changed because the taxpayer is earning a tax free income and this is unfair to other taxpayers. Another concern that people have is that the time limit to find a replacement home is to strict, this could cause asking prices for properties to be high. These concerns are not very large in the reality of things and the odds that the 1031 Exchange program would every be changed are low. In the big picture the exchange is largely helpful to everyone involved. Take a look at this link for more information.