1031 Exchanges

 

 

A 1031 exchange is a transaction which allows an owner to sell appreciated real estate and buy another often without tax consequence. It is the most effective strategy to defer taxes on capital gains and depreciation recapture which typically arise from the sale of investment property.

Since 1921, the tax code has allowed that any real estate held for investment or productive use in a trade or business may be exchanged for any other real estate that is held for investment or productive use in a trade or business. An apartment may be exchanged for an office property, office for retail, raw land for a tenant in common, etc.

By deferring taxes a 1031 exchange allows you to reinvest substantially more proceeds in a new property. The difference in income may be substantial as well.

Internal Revenue Service Code Section 1031:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for productive use in trade or business or for investment purposes.”

The IRS defines “like-kind” as any real property held for business or investment purposes. This definition includes but is not limited to, raw land, rental and commercial property, and farmland.

Benefits of a 1031 Echange with Paradigm Equity Partners:

      1. Deferral of capital gains tax, including recapture of depreciation
      2. Attractive yields from credti tenant leases
      3. Relief from property management headaches
      4. Ability to invest proceeds in a market that may offer greater potential

The Role of a Qualified Intermediary
In a 1031 exchange, the seller cannot take receipt of the proceeds from the property’s sale and must therefore utilize a qualified intermediary (QI) to hold the sale proceeds throughout the exchange process.   The qualified intermediary acts as a fiduciary, holding the proceeds during a 1031exchange.  Experienced qualified intermediaries are also able to ensure compliance with IRS regulations.

 

 


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