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  A 1031 Exchange (Tax-Deferred Exchange) Is One Of The Most Powerful Tax Deferral Strategies Remaining Accessible For Taxpayers. Section 1031 of the Internal Revenue Code is a basis for tax-deferred exchanges. Taxpayers ought to never have to pay income taxes on the sale of property if they plan to reinvest the proceeds in similar or like kind property. Professionals concerned with advising or counseling real estate investors must be familiar with concerning tax-deferred exchanges, as well as Realtors, lawyers, accountants, financial planners, tax advisors, escrow plus closing agents and lenders. 

The Advantage of a 1031 Exchange is the ability of a taxpayer to sell income, investment or business property and replace with like-kind Replacement Property while not having to pay federal or state income taxes on the transaction. A sale of property plus subsequent purchase of a Replacement Property does not work, there must be an Exchange. 

The Disadvantages of a Section 1031 Exchange explained come with a reduced basis for depreciation on the Replacement Property. The tax basis of Replacement Property is essentially the purchase price of the Replacement Property minus the gain that was deferred on the sale of the Relinquished Property as a results of the exchange. The Replacement Property so includes a deferred gain that may be taxed during the future if the taxpayer cashes of the his investment. 

Exchange Techniques. There is more than just 1 way to structure a tax-deferred exchange under Section 1031 of the Internal Revenue Code. But ,, the 1991 “safe harbor” Laws established procedures which include the utilization of an Intermediary, direct deeding, the use of qualified escrow accounts for temporary holding of “exchange funds” and alternative procedures that have the official blessing of the IRS. So, it is fascinating to structure exchanges thus which they are often in harmony with the 1991 Regulations. As a result, exchanges commonly use the services of an facilitator known as a Qualified Intermediary with direct deeding. 

Exchanges may even occur while not the services of an Intermediary when parties to an exchange are willing to exchange deeds or if they are already willing to enter into an Exchange Agreement with every other. But, two-party exchanges are uncommon as in the typical Section 1031 transaction, the seller of the Replacement Property is simply not the purchaser of the taxpayer’s Relinquished Property.

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