What In The World Is A 1031 Exchange?
What in the world is a 1031 Exchange? Well, I’ll tell ya:
Taking its name from Section 1031 of the Internal Revenue Code, a tax-deferred exchange allows a taxpayer to sell income, investment or business property and replace it with a like-kind property. Hardcore investors love this for trading properties without incurring taxes on the sale.
This is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them all together.
Do you have a cheap, little investment property and want something that pulls more income? This could be the solution.
The first deadline is identifying a property within 45 days of your relinquished property’s closing. The second rule is you must close on the replacement property no later than 180 days after the closing of the replacement property. So if you want to do this, get on it. You snooze, you lose.
For the 1031 exchange to be valid, you must exchange your property for another property of “like kind.” This is the IRS after all, so be mindful of deadlines.
To be clear, the 1031 exchange doesn’t completely eliminate capital gains and depreciation recapture tax liability. When you do an exchange, your basis gets carried forward, meaning that you start out owning your new property with your old basis. If you ever sell a property that you 1031 exchanged into without doing an exchange, you would end up paying all of the capital gains and depreciation recapture taxes that you would have paid along the way. You have one way to avoid this unpleasant consequence, though. All you have to do is to die (sorry about that.) When you die, your heirs inherit your property with a stepped up basis equal to its fair market value on the date of your death. This erases any capital gains or recapture tax liability.
More about The IRS
A man about to have a heart transplant was offered the choice of either a 26 year-old marathon runner’s heart or the heart of a 62 year-old IRS agent. He picked the agent’s heart because he said it had never been used.
I want to join a violent, armed group with no regard for the law… but the IRS isn’t hiring.
A pizza shop owner was being audited by the IRS. The deli owner asked, “What is wrong? Why am I being audited?” The IRS auditor replied, “You have got two trips to Europe down as business expenses. What is your explanation?” The pizza shop owner replied, “We deliver!”
I’ve got more of these, but this geek has got to go. Until next month, d