How the 1031 Works

A 1031 tax exchange is commonly used by real estate investors so they can defer tax liability when they sell a property. In this exchange the investor will transfer the rights of the property to an intermediary that will hold the funds from the sale of said property. The intermediary will hold the money until the investor is able to find a replacement property that fulfills the regulations that are stated in Section 1031. In this article we will discuss the 1031 exchange program and how it helps not only the investor but also the government. Learn more about 1031 gateway , go here.

Although there has been recent interest in the 1031 tax exchange and Section 1031, these are not new developments by any means. The 1031's originated in 1921, although you should know that the concept of the exchange was quite a bit different back then. The Exchange that we see today came into its current form in the 1970's, before this there were big modifications to the manner of the exchanges. The modifications that were made is what really drew the interest of real estate investors. Find out for further details on how to calculate capital gains right here.

The capital gains tax deferral that one gets from the exchange program might be looked at as a gift from the government, when in reality it is more like an interest free loan. This is because the taxpayer is expected to pay any extra funds that are gained from the deferral by accepting liability of the replacement property. However, investors can continue to use the exchange program by making an infinite number of exchanges, they will only pay the capital gains tax when they decide to sell a property outright.

You might think that the 1031 exchange is only good for the investor, when in reality it is good for the government as well. It will stimulate the economy as well as help out the tax payer. The investor will be able to transfer his or her money to the investment that they think is best.

As with many laws and things that government does, the 1031 exchange has its skeptics. One thing that has people questioning Section 1031 is because the taxpayer is getting a tax free income that is unfair to other tax payers. Another concern that people have is that the time limit to find a replacement home is to strict, this could cause asking prices for properties to be high. These concerns are real, but they are not a big threat to Section 1031, the odds are low that anything will be changed to program in the coming years. Looking at the big picture, this program is good not only for the taxpayer and investor, it is also good for the government and the economy. Take a look at this link for more info.