Real estate investors use the 1031 exchange so that they may defer tax liability on the sale of a property. How this is done is to transfer the rights to a piece of property that you want to sell to an intermediary, who holds the funds gained from the sale of the relinquished property and uses the money to acquire a replacement that fulfills the regulations of section 1031. Learn more about 1031 Gateway, go here.
1031 exchanges are not really something new. They have been around since 1921 although the original concept was different than what we know of today. It was during the 1970’s that the 1031 exchange truly came into its own with many significant modifications from the original. The modifications made the concept of the exchange process more powerful and also generated increased interest from real estate investors. Find out for further details on 1031 Gateway right here.
This capital gains tax deferral provided to the tax payer might seem to be a kind of gift from the government, but in reality it is closed to an interest free loan since the taxpayer is expected to repay the extra funds gained from the capital gains tax deferral by accepting capital gain liability on the subsequent sale of a replacement property. This interest-free loan may be kept by the investor indefinitely. An investor can choose to make any number of 1031 exchanges before finally selling outright, at which point capital gains taxes must be paid.
This exchange is a mutually beneficial arrangement between the investor and the government since it provides benefits to the economy as well as benefits to individual taxpayers. If you look upon the transfer of money in an exchange as a continuation of an existing investment instead of a transaction liable to be taxed, taxpayers gain the opportunity to move their money to the best possible investments. This then benefits the economy by bolstering job growth.
However, there are also those who look at 1031 as something negative. They say that it creates an unfair advantage because of the tax-free income gained by taxpayers. Another common concern is that the strict time limits attached to steps in the exchange process could promote a frantic rate of buying which can result in an increase in asking prices for replacement properties. However, this is actually very remote to reality and the odds that the 1031 exchanges will go through drastic changes in the coming years are really very low. If you look at the bigger picture, most will agree that 1031 exchanges are really beneficial to those who are involved because it allows taxpayers greater profits on the sale of property while additionally encouraging job growth and thus the great food of the county. There is no doubt that 1031 tax exchange is destined to remain in the investment world for years to come. Take a look at this link https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031 for more information.