At any point in time, a real estate investor may face difficulties in managing their commercial property. It can happen due to various reasons like depreciation, hike in property taxes, high maintenance cost, etc. In such a scenario, an investor generally has no choice but to either sell the property or exchange it for another one. However, exchanging one property for another is always considered as a better option than selling it out. The reason is obvious. Upon selling a property, an investor only receives proceeds that are taxable, whereas, property exchange creates many opportunities. One such opportunity, which an investor gets upon exchanging properties, is tax deferment. Yes, that’s true. Properties exchanged under Section 1031 of IRC are eligible for tax deferment.
But, what is a 1031 exchange? How does it permit tax deferment? You must be wondering so far. Basically, Section 1031 of IRC allows investors to defer capital gains taxes on exchanging commercial properties, but not personal ones. Properties exchanged under 1031 exchanges must be of ‘like-kind’. This means that 1031 exchanges allow investors to only exchange properties that are similar in nature. Therefore, a shopping complex can only be exchanged for another shopping complex in a 1031 exchange. Undoubtedly, 1031 exchanges don’t require an investor to have a wizard’s skills. However, the process isn’t that simple either. 1031 Exchange Process Explained –
A Qualified Intermediary can be any individual or company, who is authorized to participate in 1031 exchanges on behalf of the investors. A Qualified Intermediary represents an investor in a 1031 exchange and is solely responsible for carrying out the entire exchange. The reason why it’s mandatory to involve a Qualified Intermediary in a 1031 exchange is that an investor may find it difficult to identify and acquire the potential replacement property within the specified time limit. Therefore, a Qualified Intermediary acts as a helping hand in such a situation and completes the exchange on behalf of the investor. Therefore, it is recommended that investors, pursuing 1031 exchanges, must compare different Qualified Intermediaries before hiring one as the entire exchange depends upon them.
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September 2019
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