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1031 Tax Exchanges - Good For Investors, Good For the Country

By: Trisha Coppley

The 1031 tax exchange is a technique commonly used by investors in real estate so that they may defer capital gains tax liability on the sale of a property. This is accomplished by relinquishing the rights to a piece of property that one would like to sell to a qualified intermediary, who then holds the proceeds from its sale and uses the money to acquire a replacement property in compliance with the rules delineated in Section 1031 .

Although the current popularity of the 1031 tax exchange may lead one to believe that Section 1031 only recently came on the scene, this is untrue. Actually, the 1031's history stretches as far back as 1921, although at its conception, it was significantly different from the 1031 exchange we have come to know and love. Section 1031 truly came into its own in the 1970s, which saw a host of significant modifications in the way that exchanges were conducted. These modifications paved the way to a more far-reaching conception of the process and created increased interest from property investors.

The capital gains tax deferral Section 1031 provides to the taxpayer might, at first, seem to represent a gift given by the United States government, but it is, in reality, closer to an interest-free loan, because the taxpayer is expected to "repay" the extra funds acquired by way of the deferral by paying capital gains taxes upon the eventual sale of a replacement property. Additionally, this interest free loan is one that may be kept by the investor for an indefinite period of time; an investor can choose to make any number of 1031 exchanges before finally deciding to make an outright sale, on which capital gains taxes must be paid.

The 1031 exchange constitutes a mutually advantageous arrangement between the investor and the United States government, profiting the country's economy as a whole as well as the individual taxpayer. By viewing the transfer of money in an exchange as representing a continuation of a preexisting investment instead of as a discrete transaction liable for taxation, investors are given the opportunity to move their money into the most profitable possible investments. This, in turn, helps to elevate the economy by bolstering the growth of new jobs.

As with anything, Section 1031 has its skeptics. one objection that has been raised against 1031 is that the tax-free profit gained by to the taxpayer in the exchange process represents an unreasonable advantage. Another common concern is that the strict time limits attached to some aspects of the exchange procedure could promote an atmosphere of frantic buying, with a resultant increase in the prices of replacement properties. These criticisms, however, are only loosely based in reality, and the odds that Section 1031 will see significant change in the near future are slim. When looking at the big picture, most will agree that Section 1031 is greatly helpful to all parties , as it allows investors increased profits on the sale of their property while also encouraging job growth and therefore the greater good of the country as a whole. Little doubt exists that the 1031 tax exchange is destined to be a mainstay of the property investment world for decades to come.

About the author

Many Investment Properties Qualify For A 1031 Property Exchange. Be Sure To Consult With A 1031 Exchange Intermediary To Maximize Your Tax Savings. More Information Is Available At www.Top1031Exchange.com

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