Tax Incentives
The 1031 Tax Deferred Exchange And More – Did You Ask the Right Question?
By Buyincomeproperty.com
Nov 18, 2005, 22:05

It’s been said that only two things in life are guaranteed – death and taxes. If you fail to pay taxes, someone will likely be tracking you down to collect that money. The same is not true if you overpay.

Unfortunately, it all comes down to knowing the right questions to ask. “Does this real estate transaction qualify for a 1031 tax deferred exchange?” is one question you should ask, along with, “What other tax breaks or tax exemptions might apply?”

The 1031 tax deferred exchange is merely a tax exemption on some specific real estate transactions. This tax deferral applies when you’re selling a particular piece of property and can greatly increase the amount of profit you have to put onto the next real estate investment. Consider a very basic description of how this tax break works.

Typically, when you sell a piece of property, you’re going to be paying a capital gains tax on that transaction. The cost is a significant amount of the transaction price. But if the property were used as your business or as an investment – such as rental property – the transaction may very well fall under the rules for the 1031 tax deferred exchange. That means that you’ll pocket more of the selling price, increasing the amount you have available for your next transaction.

But how do you know whether the 1031 tax deferred exchange applies to your particular situation? You have a couple of options – you can become an expert in real estate transactions and keep track of all the new laws, or you can depend on an accountant, attorney or some other professional. If you choose to go with a professional, keep in mind that this person needs to be familiar with your real estate investments and transactions in order to help you know what tax deferrals might apply.

Taxes are a fact of life, even when you’re working on real estate deals and making investments. But there are lots of tax deferrals and tax breaks available, just like the 1031 tax deferred exchange. If you don’t have someone who is both familiar with tax law and with your real estate investments, you may fail to provide the information that would result in significant savings in tax deferrals.

Consider this example. You have a couple of pieces of rental property, but a young couple who have lived in one of your houses for several years wants to buy it. You’ve had your eye on some other property and think it’s a good exchange, so you agree to the deal. But after you fork out the capital gains tax, you don’t have enough to immediately make the transaction as planned. More than likely, you qualified for the 1031 tax deferred exchange. You may not have known to ask if you qualified for the 1031 tax deferred exchange and the person doing your taxes may not have realized what the property was being used for.

It’s equally important that you be certain your real estate transaction does qualify for the 1031 tax deferral exchange (or any other exemption) before you claim it.