1031 Exchanges - Good for Investors, Good for the Country

A 1031 exchange is a tactic used by real estatecapital gains taxes must be paid.
investors to indefinitely defer tax liability on aThe 1031 exists as a mutually advantageous
property's sale. This is achieved by giving the rightsagreement between investors and the U.S.
to a property one would like to sell to angovernment, providing a benefit for the U.S.
intermediary, who holds on to the funds gained fromeconomy as well as the individual taxpayer. By
the sale of the relinquished property and uses themviewing the transfer of value in an exchange as
to buy a replacement property that complies withrepresenting a continuation of a preexisting
the rules set out in Section 1031 .investment rather than as a separate transaction
While the present popularity of the 1031 could leadliable for taxation, taxpayers are given the
you to believe that it only recently came on theopportunity to move their funds to the most
scene, this is untrue. Actually, the history of the 1031profitable possible investments, which, in turn, boosts
extends all the way back to 1921, although at itsthe economy by bolstering job growth.
conception, it was quite a bit different than what weLike anything else, the 1031 exchange has its
today think of as an exchange. Section 1031 reallydetractors. Some advocates of change in Section
came into its own in the 1970s, which saw a host of1031 will argue that the tax free profit gained by to
significant modifications in the manner that exchangesthe taxpayer in a 1031 lends them an unreasonable
were regulated. These modifications paved the wayadvantage. Another frequent concern is that the
to a farther-reaching conception of the process andstrict time limits attached to some aspects of the
also generated greater interest among propertyexchange procedure may engender a frantic rate of
investors.buying, resulting in an increase in the cost of
The indefinite capital gains deferral an exchangereplacement properties. These complaints, however,
grants to the taxpayer may, at first, seem to be aare only loosely based in reality, and the odds that
sort of gift from the US government, however it is,the 1031 exchange procedure will see noteworthy
in reality, closer to an interest-free loan, becausechanges in the near future are quite slim. In general,
there is an expectation that the investor will "repay"most will agree that Section 1031 is greatly helpful to
the extra funds gained from the deferral by payingall parties involved, allowing taxpayers increased
capital gains taxes upon the eventual sale of aprofits on the sale of property while also encouraging
replacement property. In addition, this interest freejob growth and consequently promoting the greater
loan may be kept indefinitely; an investor can choosegood of the country as a whole. There is little doubt
to conduct any number of exchanges beforethat the 1031 will be a mainstay of the property
ultimately deciding to sell outright, at which pointinvestment business for years to come.