1031 Exchange: A Section Contained in the Internal Revenue CodeEsteri Maina
October 20, 2008 — 1,478 views
A 1031 exchange is often referred to as a starker exchange. It is a section contained in the internal revenue code providing for the sale of a investment property such a real estate into the purchase of one or more other "like kind" properties.
At closing the sale, the proceeds there from are transferred to a third person called a facilitator or a qualified intermediary.
He then holds the proceeds till they are used for acquisition of the new property.
A 1031 exchange is possible when you sell real estate held only for investment purposes but not for the sale of your personal residence.
What are the so called "like kind" properties
One thing you must understand is that the IRS (internal revenue service) gives the rules as pertaining 1031 exchange as well.
The "like kind" property in other words mean you must exchange an investment property with another one that is alike for example a real estate exchange, the expectation is that for a real property to be exchanged for another.
This is however not necessarily a direct exchange such as land for land or whatever. The IRS rule indicates which properties qualify for this You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed as a cash sale.
Note: In a "like kind" exchange, both the property you give up and the property you receive must be held by you for investment or for dynamic use in your trade or business. This is directive of the IRS.
A Qualified Intermediary is a self-governing party who aid tax-deferred exchanges subsequent to Section 1031 of the Internal Revenue Code. He or she cannot be a taxpayer or unqualified person.
The employment of a qualified intermediary is a protection established by the Treasury Regulations.
All the taxpayer has got to prove is meeting the requirement of this and the IRS will handover the proceeds directly to the qualified intermediary.
When they are needed to acquire the replacement property, this party then delivers the funds directly to the closing agent.
Roles of the qualified intermediary involve:
He or she acquires the relinquished property and transfers it to the buyer acting under a written agreement with the taxpayer,
Then he or she holds the sales proceeds, to thwart the taxpayer from having actual or beneficial receipt of the funds.
Finally, he or she acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.
1031 exchange ends the moment the taxpayer has actual or constructive receipt (i.e. direct or indirect use or control) of the proceeds from the sale of the relinquish property.
Does the Qualified Intermediary essentially take title to the properties?
The IRS regulations allow the properties to be feat directly between the parties, just as in a normal sale transaction. The taxpayer's interests in the property purchase and sale contracts are assigned to the qualified intermediary.
The qualified intermediary then instructs the property owner to assign the title to the property directly to the appropriate party that is; for the surrendered property to its buyer and for the replacement property to the taxpayer.
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