IRC §1031 TAX DEFERRED EXCHANGES

The §1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth.  This provision of the Internal Revenue Code allows property owners to exchange their property for other like-kind property without recognition of capital gains.  It makes possible to transfer the financial gain that is realized from the sale of a property into another property without federal capital gains tax at the time of the sale.

The 1031 Exchange is Different From a Swap

Exchanging properties is not new.  The "your property" for "my property" type of direct exchange (i.e., a swap) has been in practice for a long time - it's called a two-party exchange.  The difficulty is rarely will you find two owners who each want the other's property.  Normally, the other owner wants to sell.  This presents a problem if you want to dispose of property to finance the acquisition of new property and avoid taxable gains that would substantially reduce your equity.

The three-way or multi-party exchange was a tax-inspired technique designed to solve the dilemma of a two-way swap.  However, these exchanges were fraught with danger.  When one or more of the parties would not cooperate with the exchange, or one of the legs failed, the exchange failed.  Multi-party exchanges, at best, were difficult and risky.  And trying to sell your old property before closing on the purchase of the new property is almost impossible.  This presents a problem if you desire to dispose of property to finance the acquisition of new property but want to avoid selling your property in a taxable event.  A sale would produce taxable gains and could substantially reduce your after-tax proceeds.  If you could exchange your property tax-free for the desired property, you could benefit from the fair market value of your property undiluted by income taxes on the sale.  In other words, you can use your entire equity before taxes to purchase the Replacement Property.

To solve the dilemma, on April 25, 1991, the IRS issued the long-promised deferred exchange regulation-Reg 1.1031(k)-1.  It permits you to "sell" your Relinquished Property now and use the proceeds to buy the Replacement Property later.  As long as it's done following the rules and using the services of a Qualified Intermediary, you get tax-deferred treatment under IRC §1031.

Qualified Intermediary

A deferred exchange is an exchange in which you transfer qualified property called the "Relinquished Property" and subsequently receive qualified property as consideration.  The property received is called "Replacement Property."  However, the transaction only qualifies for tax-deferred treatment if the exchange is performed by a Qualified Intermediary.  GTX1031 is a Qualified Intermediary.  A Qualified Intermediary is permitted to serve as your agent and do the exchange transaction for you and thereby avoid causing the sale of your old property to be considered a taxable event.  By using a Qualified Intermediary to handle your exchange transaction, and by complying with the other procedures required under §1031, you can now turn the sale of your property, and subsequent purchase of another "like-kind " property, into a §1031 tax deferred exchange.

The §1031 tax deferred real estate exchange is a powerful tool and strategy for selling appreciated business, farms, land, and investment real estate without recognition of gain for income tax purposes.  §1031 has the weight of law and all parties must follow it – even the IRS.  §1031 establishes and defines the Qualified Intermediary as your vehicle to qualify the non-recognition of gain treatment on your deferred exchange.  As a Qualified Intermediary, GTX1031 provides professional quality, cost-effective §1031 exchange services.