Thursday, February 25, 2010

What is a 1031 Exchange?

A 1031 exchange is a tax planning strategy that allows individuals to defer capital gains taxes. Real estate investors may qualify for this type of exchange when they sell a property and reinvest the proceeds in a “like-kind” property.

This leads to the question of what qualifies as “like-kind” property. The IRS states that “properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality.” In a 1031 exchange the definition of “like-kind” properties does not apply to livestock of different sexes, or to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness. One important note: in an exchange of real property it generally does not matter if the properties are improved or unimproved. What does matter, however, is whether or not both properties are located in the United States.

In order to participate in a 1031 exchange, the IRS requires that a qualified intermediary facilitate the exchange. This intermediary will be able to walk an individual through all of the special rules found in the Internal Revenue Code regarding 1031 Tax Free Exchanges.

The attorneys at Peterson Law Group have formed a qualified intermediary called Brazos 1031 Exchange Company. If you have any questions or would like to perform a 1031 Tax Free Exchange, contact them today.

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