| As a common cliché would have put it, taxes are | | | | to, or more than the net sales proceeds of the sold |
| inevitable. However, we break tradition in this article | | | | real estate property. |
| as we discuss a method to avoid paying taxes. | | | | - The entire equity from the sale of relinquished real |
| Exchange 1031 is a provision that allows the | | | | estate property must be used to pay for the |
| homeowner to keep the entire proceeds for the sale | | | | replacement ‘like kind’ real estate property. |
| of a real estate property by exemption of payment of | | | | The amount of liability for violation will be determined |
| capital gains tax. | | | | by the violation of any of these two conditions. In the |
| A Closer Look at Exchange 1031 | | | | event that the replacement property is bought at a |
| This privilege is governed by the provisions of the IRS | | | | price less than the net equity of the sales proceeds of |
| Code under section 1031, thus the term Exchange 1031. | | | | the relinquished real estate property, an accrued tax |
| This incentive aims to perk up business activities in the | | | | liability is incurred by the one who availed a tax |
| real estate sector by giving due consideration for | | | | deferral under Exchange 1031. |
| homeowners who sell their real estate property with | | | | The amount of accrued tax liability is based on the |
| the primary purpose of using the sales proceeds to | | | | extent of the amount of net equity not utilized for the |
| purchase another real estate property. | | | | payment of the replacement ‘like kind’ real |
| A graphical demonstration of how significant Exchange | | | | estate property. |
| 1031 is on the entire buying process would be by | | | | This only means that exclusion of tax incentives under |
| looking at the impact of capital gains tax on | | | | Exchange 1031 is not absolute when applying the |
| subsequent buying of ‘like kind’ property. | | | | above cited prerequisites. The application of the |
| Capital gains tax levied against the sales proceeds of | | | | provisions allow for partial exchange as a result of |
| a real estate property hover in the range of 20% to | | | | failure of absolute compliance under the two |
| 30%. This is translated to a diminished buying | | | | prerequisites. Exchange under this condition is |
| capacity of the same proportion for a replacement | | | | subjected to partial deferment of capital gains tax |
| property. In other words, you are left with a net | | | | liability. Tax liability is applied on that portion of equity |
| amount corresponding to 70% to 80% of what it was | | | | that is subject of tax deferral under Exchange 1031 |
| during the sale of the real estate property. | | | | used for ‘non-like kind’ real estate property. This |
| There are pre-conditions that have to be met for the | | | | tax incentive is an essential tool for homeowners and |
| deferment of realized capital gains tax for the sale of | | | | investors to retain in full the equity generated in the |
| a real estate property under Exchange 1031. These | | | | sale of a real estate property for as long as it is |
| include the following prerequisites: | | | | intended to be used for the purchase of another |
| - The fair market value of the replacement ‘like | | | | ‘like kind’ real estate property. |
| kind’ real estate property should always be equal | | | | |