Tuesday, June 20, 2006

Avoiding Taxes on Property: The 1031 Exchange!

In a nutshell, a 1031 Exchange is a section of the IRS code that allows you to exchange one rental property for one or more of equal or greater value, without paying any taxes. There are rules and regulations you have to follow, but they are clearly set out, and a third party intermediary, called an "accommodator," will handle the transaction for you.

The IRS says that if you touch the money, you pay the tax. But if you use a qualified intermediary to transfer the money from the sold property to the purchased one(s), you qualify for a tax-free exchange. This person should be a member of the Federation of Exchange Accommodators, and bonded.

You may want to exchange your rental property for a variety of reasons. Perhaps you no longer want to manage it. Or, you want to own a property that can be more readily refinanced. Then, you could exchange one property that is not so easy to take cash out of, for one that is. This is true for houses, vacant land for apartments, or an office building, to name a few. And, you have 180 days after the sale of one property, to close on the replacement. You can even buy a new property before selling the old one, that’s called a "reverse" Exchange. In that case, the intermediary holds title for you until you sell the old property. Make sure you tell your Realtor that you'll want to perform a 1031 Exchange whether you are buyer or selling so that the proper wheels can be put to motion!

Naturally, as with any tax related matter, you should consult your tax accountant or tax attorney.

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