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Section 1031 and the 1031 Exchange

The 1031 tax exchange is a common tactic that is used by investors of real estate so that they can defer tax liability when they sell a property. This is done when the investor transfers the rights to a property to an intermediary, this person will hold the funds that are gained from the sale. 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. This article is going to look at the 1031 exchange, its origins and how it helps not only the investors but also the government.

Although there has been recent interest in the 1031 tax exchange and Section 1031, these are not new developments by any means. Although the original concept of the 1031’s was quite a bit different then they are today, the history dates back to the early 1920’s. 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 resulted in a more powerful exchange process, the new exchange is also what really brought real estate investors into the mix.

The exchange program will over a capital gains tax deferral, this might seem to some like a nice gift from the government, but in reality it is actually similar to 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. Investors can continue to use the exchange program as long as they wish, they will only pay the capital gains tax once they decide to sell their property outright.
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The 1031 exchange exists because it is beneficial to both the investors and the government. It will stimulate the economy as well as help out the tax payer. People will be able to transfer their money into the investment that they think is best for them.
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Section 1031, just like many things in government 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. Other people are concerned with the time limits put on investors to find a replacement property, this might result in hire asking prices for investment properties. 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.