1031 Tax Exchanges - Good For Investors, Good For The U.s.

2008-02-20 Word Count: 519 Category: Taxes

The 1031 exchange is a method often used by real estate investors in order to defer capital gains tax liability on a property's sale. This is achieved by relinquishing the rights to a piece of property that one would like to sell to an intermediary, who holds on to the sale proceeds and uses them to buy a replacement property that complies with the regulations set out in Section 1031 .

Though the present popularity of the 1031 could give you the impression that it is a recent development, this is not actually true. Actually, the 1031's history extends all the way back to 1921, although at its conception, it was quite different than what we today think of as an exchange. The 1031 Exchange truly came into its own in the '70s, which saw many significant modifications in the way in which these exchanges were regulated. These modifications paved the way to a more powerful conception of the process and generated greater interest among real estate investors.

The indefinite capital gains deferral a 1031 exchange provides to the taxpayer might, at first glance, appear to represent a sort of gift given by the government, but it is, in reality, closer to an interest-free loan, because the taxpayer is expected to repay the funds gained from the tax deferral by paying capital gains taxes on the subsequent sale of a replacement property. Additionally, this ”interest free loan” is one that may be kept for an indefinite period of time; an investor may conduct any number of 1031 exchanges before finally sell outright, at which point taxpayer must pay capital gains taxes.

Section 1031 constitutes a mutually advantageous agreement between the investor and the U.S. government, profiting the U.S. economy as a whole in addition to the individual taxpayer. By looking upon the transfer of value in an exchange as a continuation of an existing investment instead of as a separate transaction liable to be taxed, taxpayers are given the opportunity to move their funds into the best possible investments, which, in turn, boosts the country's economy by encouraging the growth of new jobs.

As with anything, the 1031 exchange has detractors. Some advocates of change in Section 1031 will pose the argument that the untaxed income provided to the taxpayer in the exchange process creates an unfair advantage over other buyers. Another frequent concern is that the strictness of the time limits imposed on steps in the 1031 procedure could engender an atmosphere of frantic buying, resulting in an increase in asking prices for replacement properties. The aforementioned criticisms, however, are only loosely linked to reality, and the odds that the 1031 exchange procedure will see significant changes in the foreseeable future are quite slim. In general, most will agree that Section 1031 is immensely helpful to all parties involved, allowing taxpayers greater profits on the sale of property while also promoting job growth and consequently promoting the greater good of the U.S.. Little doubt exists that the 1031 will remain a mainstay of the property investment world for decades to come.

This free Taxes article is brought to you by http://www.articlevista.com

Section 1031 Exchange (Of The IRC) States That Property Investors Can Use A 1031 Property Exchange When Selling And Buying Like Kind Investment Property. To Find Out More Visit www.Top1031Exchange.com