what's a 1031 exchange?

Question

is for a house for sale

Answer 1

It's a legal process for taking your earnings made on the sale of the house, and reinvesting in other property for the purpose of deferring taxes until a later date.

Answer 2

A 1031 exchange is a means for deferring taxes on the gain from the sale of real property. Someone can buy a property, rent it for 10 years while it appreciates, sell it and buy another (or several) properties with the proceeds, and as long as they do not take any of the proceeds for themselves, they will not have to pay taxes on those gains. It's like playing Monopoly; buy a property, put a few houses on it, and exchange those houses for a hotel. It's a means for a steady increase in wealth without getting slowed down by the "drag" created by taxes. Very powerful tool in real estate.

One thing to be aware of, is that a qualified intermediary must handle the exchange. There are regulations associated with it and deadlines for locating the target property (or properties) for the exchange. This means some additional paperwork and can present some delays for a potential buyer, because the settlement process can have a few wrinkles. Shouldn't scare a buyer away, but something to consider.

Answer 3

A "1031 Exchange" is a transaction that takes places pursuant to Section 1031 of the tax code. It is sometimes also referred to as a "like kind exchange" because it allows you to basically exchange one property for another of a like kind without paying income or capital gains taxes on the profit made from selling the original property/ Despite these posts, you cannot do a 1031 exchange with respect to residential property.

Bascially, say you invest $1m in a commercial property, and you want to and can sell that property for $1.2m. You will have earned $200,000 on the sale, and those earnings would be taxable. Under Section 1031 of the tax code, you can go through a process where you take the $1.2m that results from the initial sale and invest it in a like kind property without paying tax on the earnings. As a result, when you subsequently sell the replacement property, the calculation of your earnings is based on the $1.0m initial investment, not on the subsequent $1.2m investment because you never paid taxes on the $200,000 of earnings from the original sale. Essentially, a 1031 allows you to defer recognizing income, but it does not allow you to eliminate tax payments.

There are a lot of qaysd to screw this up, so contact a real estate attorney or a qualified 1031 exchange agent for help BEFORE you undertake your sale of the original property. Most national title comapnies such as First American offer 1031 exchange services.

Answer 4

Most of the answers are pretty good... with a few points needed clarified.

A 1031 exchange is a process in which investment property can be sold and the resulting capital gains taxes deferred by reinvesting the proceeds from the sale into another investment property.

They can be confusing, but are pretty easy to do.

Here is my website that I'm launching about 1031 exchanges:
http://www.1031store.com

Also, you will be able to exchange residential property, and exchange into any type of property you'd like, as long as it is for investment puposes.

To compute your capital gains, here's a capital gains calculator:
http://www.1031store.com/resources/1031_capital_gains_calculator.php

Note, though, if this is your primary residence that you are selling, it would fall under a different category of exchange: section 121 exchange. This is better if you live in the home, because you are allowed a gain up to 250K, if single,500 k if married.

Visit http://www.1031store.com for more exchange information.

Answer 5

Basically, it's a tax free transfer, allowing you to defer taxes to your next house. You can find more detail in this 1031 exchange article:
http://www.themoneyalert.com/1031ExchangeArticle.html

Answer 6

A 1031K is a way to avoid paying taxes on profits made on the sale of property. It is only good for 180 days.