Wednesday, February 04, 2009

What Is A 1031 Exchange?

Any real estate property owner or investor of real estate, should consider a 1031 exchange when he/she expects to acquire a replacement "like kind" property subsequent to the sale of his existing investment property. Anything otherwise would necessitate the payment of a capital gain tax, which can exceed 20-30%, depending on the federal and state tax rates of your given state. To make it easy to understand, when purchasing a replacement property (without the benefit of a 1031 exchange) your buying power is reduced to the point, that it only represents 70-80% of what it did previously (before the exchange and payment of taxes).

'Exchanging' a property, represents an IRS-recognized approach to the deferral of capital gain taxes. It's very important for you to understand the components involved and the actual intent underlying such a tax deferred transaction. It is within Internal Revenue Code Section 1031 that we can find the appropriate tax code necessary for a successful exchange. Go to for a few links to 1031 exchange companies, where you can learn about these exchanges. Please note that an important ingredient of a successful exchange is a qualified exchange agent.

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