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1031 tax exchange definition |
Written by Adam Morien
Thursday, 24 April 2008
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In the world of legal real estate transfers and overarching tax codes, there are many special regulations in place to suit a wide variety of circumstances. If you are a real estate investor, then, it is critical that you understand the basic 1031 tax exchange principles. To put it simply, the 1031 tax exchange provides a way for real estate investors to grow the value of their investments over time without losing cash to pay taxes each and every time a property is sold. This means that investors are able to move up the rungs of the property ladder more quickly and easily - while still adhering to regulations and tax codes. The reason the 1031 exchange was developed was to solve a problem that surfaced in the transfer of properties held for investment purposes. Consider the following: you are a real estate investor who purchased a property a number of years ago for the price of $100,000. Today, the value of that property stands at $200,000. To grow the worth of your investment, you would like to sell that property (for $200,000), then purchase a new $200,000 property that you believe represents a more promising investment for future gains. Because the property you would like to sell is not a primary residential property (but rather is a rental or business property of some sort), however, the rise in value (here, $100,000) is subject to capital gains taxes. This means that upon selling the property for $200,000, you won't be able to walk away with the actual $200,000 you need to purchase the new property you desire. Instead, the capital gains tax paid on the rise of the worth of your investment means that you will walk away from the sale with a lower total - and might thus be unable to purchase the replacement property you want. The goal of the 1031 tax exchange is to make that transaction possible: with a 1031 exchange, you can sell your property for $200,000 - and then immediately reinvest that money into a new property without paying capital gains taxes in the interim. This allows you to grow the worth of your investment assets more quickly and more effectively: with the 1031 tax exchange, you are able to move up the rungs of the property ladder without taking one step back for every two steps forward. Smart investors, then, learn how to use 1031 tax exchanges to their benefit. It is important to note, however, that the 1031 exchange does not in any way provide for evasion of taxes - only procrastination. When you eventually exit the real estate business (by selling your final property without reinvesting that money in a new one), you WILL pay taxes on your overall gains. Article Source: http://www.ArticleBlast.com |
About The Author:
If you are a real estate investor, then, it is critical that you understand the basic 1031 tax exchange principles. To put it simply, the 1031 tax exchange provides a way for real estate investors to grow the value of their investments over time without losing cash to pay taxes each and every time a property is sold.
If you are a real estate investor, then, it is critical that you understand the basic 1031 tax exchange principles. To put it simply, the 1031 tax exchange provides a way for real estate investors to grow the value of their investments over time without losing cash to pay taxes each and every time a property is sold.
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