Section 1031 of the Internal Revenue code, which has been effect since 1921, deals with regulations for the 1031 Tax Deferred Exchange. The 1031 exchange allows a real estate owner to exchange a property for another of a like kind and defer taxes on any profits until the property is eventually sold. But what if it is never sold? Follow along and see how one family used the 1031 exchange to build significant wealth. It’s 1926 and the Powell family operates an eight-room boarding home in Chicago. Mrs. Powell is the actual manager and handles the renting of rooms along with cooking and housekeeping duties. Her husband works full time while doing maintenance on the home in the evening and weekends. Their children also help out with some of the chores. In 1939 the Powells decide to leave the city and head for the suburbs. They find a man with an apartment building just outside of town and make a fair and even swap. Without understanding the full implications of what they’ve done, they later learn through an account that there are no taxes due on the transaction. Although such exchanges were far less formal in 1939, they had carried out a 1031 tax deferred exchange. In 1960 the son and daughter of the Powells remain as sole heirs to the apartment building. They want to sell it but understand that they’d face significant taxes on any profits from a sale as the value of the apartment has grown significantly. They speak to an attorney and learn that they can once again swap the property for one of greater value and of like kind. They locate an even larger apartment in the city and effect yet another 1031 exchange. However, this time they each receive some cash. Since it is only real estate that qualifies for deferred tax treatment, they each have some taxes to pay for the cash they collected while the majority of the tax due on the profit are again deferred. I could keep the ball rolling with this example but I believe I’ve made my point. In time, as real estate continues to appreciate, a modest investment in yesterday’s income producing property could have been parlayed into a small, or even large fortune with today’s prices. The example I’ve used is fictional, however, there are thousands of similar true-to-life stories in the real world that have allowed people to achieve wealth. For clarification, let’s look at how a 1031 exchange would take place today. An individual wanting to sell an income or investment property and defer paying taxes on any gains would first locate a buyer and close on the property. They would then take the proceeds and place them with a qualified intermediary. Once done, the individual would have 45 days to locate and identify another like kind property and 180 days to complete the exchange using the proceeds from the sale of the original property. A like kind property would be defined as one of the same type, which would be an income producing or investment property. Taxes on any gains would be deferred until the property was eventually sold. And as our example illustrates, that might be a long time. Here’s to your family dynasty!
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If you invest in real estate then you should learn about the 1031 exchange. Take advantage of the tax savings through a 1031 exchange. Get more information regarding 1031 exchange. |
