One of the Last Tax Shelters
A 1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment property for like-kind property and defers the payment of capital gain taxes. The IRS defines like-kind property as all real property held for the productive use of trade or business or for investment purposes. This basically means any real estate held for investment except your primary residence and second family home.
There are some important rules which must be followed to effectuate a valid exchange:
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The exchange must be opened before the close of escrow on the relinquished (sale) property.
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The taxpayer must identify the replacement (acquired) property within 45 days after the close of the relinquished (sale) property.
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The taxpayer must close the replacement property within 180 days from the close of the relinquished property or the tax return filing of the relinquished property, whichever comes first.
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The taxpayer must reinvest all net proceeds into the replacement property.
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The taxpayer must obtain a debt of equal or greater amount on the replacement property.
By following these rules, the taxpayer may shelter the capital gain taxes into the replacement property. This creates more buying power for the taxpayer than if the capital gain taxes were paid. Also, by deferring the payment of capital gain taxes, the taxpayer gets to invest the taxes interest free from the IRS.
