Lake Shelbyville Topics: 1031 Exchange

Lake Shelbyville Topics: 1031 Exchange - Tax Deferred

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	Name:	Maverick -
	Subject:	1031 Exchange - Tax Deferred
	Date:	8/18/2006 9:34:41 AM

Section 1031—Tax-Deferred Like-Kind Exchange of Property Held for Rental, Investment or Used In a Business

Section 1031 of the Internal Revenue Code (“1031 exchange”) provides that real property held for rental, investment or use in a business (“relinquished property”) can be exchanged for “like-kind” real property also held for rental, investment or use in a business (“replacement property”) allowing the Investor to defer his or her Federal, and in most cases, state income tax liabilities.

It is important to note that 1031 exchange transactions are tax-deferred exchanges — not tax-free exchanges — as many authors and advisors frequently refer to them. The Investors ’s capital gain and depreciation recapture tax liabilities are merely deferred — and can be continually and indefinitely deferred — into like-kind replacement properties acquired as part of a series of 1031 exchange transactions.

The tax deferral benefits of the 1031 exchange allow a Investor to sell, dispose or convert real property without reducing his or her cash position by paying capital gain or depreciation recapture taxes. This provides the Investor with the continued liquidity necessary to increase his or her real estate portfolio by trading up in value and ultimately increasing his or her net worth by improving cash flow and capital appreciation from the portfolio.

A Qualified Intermediary is required when completing a 1031 exchange transaction. Section 1031 of the Internal Revenue Code applies to personal property as well as real property