1031 TAX-DEFERRED EXCHANGE
In general, section 1031 of the Internal Revenue Code
allows an owner to exchange one
property for another and defer payment of the state and federal capital gains taxes, as
long
as both properties are of "like-kind" That is, the properties must be either
1) held for productive use in a trade or business, or
2) held for an investment
For example, single-family rental houses in Idaho can be
exchanged for a commercial
building in Colorado. This flexibility helps property owners realize their investment
objectives. By exchanging instead of selling for cash, owners can diversify or consolidate
holdings, reduce management commitments, or improve cash flow.
Over the long term, acquiring real estate through exchanges
is an excellent method of
building wealth. Section 1031 allows continued deferral of taxes on subsequent exchanges,
enabling the owner to increase equity without the burden of capitol gains tax.
In sum, the 1031 is the sale of one property followed by
the purchase of another. It is
critical that funds are held by a qualified intermediary, that both properties are
"like-kind",
and that the exchange time period requirements are met. After the sale of the primary
property , the exchanger then has 45 days to identify and 180 to close on the replacement
(target) property.
TRA-97 ACT-1997
TAX REFORM ACT
The new tax law created a valuable tax-saving opportunity
for many homeowners. For home
sales after May 6, 1997, married couples can exclude from tax up to $500,000 in profits
from the sale of their principal residence ( single taxpayers can exclude up to $250,000).
For
the vast majority of homeowners, this exclusion will mean tax-free profits on home sales.
Moreover, as long as the taxpayers have occupied a home as their primary residence for at
least two of the five years before the sale, they can use this exclusion each time they
sell their
home.
There is no longer a minimum age requirement to use this
exclusion and it makes it possible to
sell a home with a large gain and purchase a new home of lesser value, or rent a home ,
without
having to pay any capital gains tax. It also allows a homeowner to sell their primary
residence,
then move to their second home, live in it for 2 years or more and then sell it as their
primary
residence without creating a taxable event.
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