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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.

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 manner in which exchanges were conducted saw a lot of modifications over the years but the modern 1031 Exchange came into its own in the 1970’s. The modifications that were made is what really drew the interest of real estate investors.

Some people might view the capital gains tax deferral that one gets from the exchange program as a nice gift from the government, in reality it is much 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. 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.

The 1031 exchange exists because it is beneficial to both the investors and the government. The country’s economy will benefit from this as well as the taxpayer. Transferring money through the exchange program will allow people to invest their money in the best possible place.

Like many regulations in government, the 1031 exchange has many skeptics. Some people are advocating that Section 1031 needs to be changed because the tax free income that is gain by the taxpayer is unfair. 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.
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