Why a 1031 Capital Gains Deferral is Like an Interest-Free Loan to Investors

By: Trisha Coppley

The 1031 tax exchange is a method often used by investors in real estate to indefinitely defer tax liability on a property's sale. This is done by giving rights to a property one plans on selling to a qualified intermediary, who holds the funds gained from the sale of the relinquished property and uses the money to purchase a replacement property that complies with the regulations delineated in Section 1031 .

Although the present interest in the 1031 may lead one to believe that Section 1031 is a recent development, this is not true. As a matter of fact, the 1031's history extends all the way back to 1921, although it was originally was significantly different from the exchange we have come to know and love. The 1031 Exchange truly came into its own in the '70s, which saw a host of significant modifications in the manner in which these exchanges were regulated. These modifications paved the way to a farther-reaching conception of the exchange process and also generated increased interest from property investors.

The indefinite capital gains tax deferral a 1031 exchange provides to the taxpayer may, at first glance, appear to be a sort of gift given by the US government, but it is, in reality, closer to an interest-free loan, because the taxpayer is expected to repay the extra funds gained from the tax deferral by accepting capital gains liability upon the subsequent sale of a replacement property. In addition, this “interest-free loan” may be kept by the investor indefinitely; an investor may choose to conduct any number of exchanges before ultimately making the decision to make an outright sale, on which the investor must pay taxes.

The 1031 exchange exists as a mutually beneficial arrangement between the investor and the U.S. government, providing a benefit for the country's economy as well as the individual taxpayer. By looking upon the transfer of value in an exchange as an extension of an existing investment rather than as a separate transaction liable to be taxed, investors are given the opportunity to move their money to the best possible investments. This, in turn, boosts the economy by encouraging job growth.

As with anything, the 1031 exchange has its detractors. one criticism that has been leveled against Section 1031 is that the untaxed profit gained by to the taxpayer in the exchange process lends them an unfair advantage. Another frequent issue of concern is that the strict time limits attached to steps in the 1031 procedure could promote an atmosphere of frantic buying, with a consequent increase in the cost of replacement properties. These criticisms, however, are only tenuously based in hard evidence, and the odds that the 1031 exchange procedure will go through noteworthy changes in the near future are slim. In general, most will agree that Section 1031 is immensely beneficial to all involved, as it allows investors increased profits on the sale of their property while also promoting job growth and consequently promoting the greater good of the country as a whole. There is little doubt that the 1031 tax exchange is destined to be a part of the property investment business for years to come.

Many Types Of Investment Property Qualify For A 1031 Like Kind Exchange. Be Sure To Consult With A 1031 Exchange Company To Maximize Your Tax Savings. More Information Is Available At www.Top1031Exchange.com

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