A 1031 exchange

Written by admin on June 27th, 2011

Many people are in the business of investing in property or own a property for use by a business. But what do you do when that property is no longer servings its purpose? You sell it and pay the gains tax and move on to purchasing another property.

Under normal circumstances that would be correct, however there is one rule that many people don’t know about that could change how you approach your next business property purchase.

Many businesses don’t know that they could be getting a free loan from the IRS to use when purchasing that new property. A 1031 exchange allows you to do just that.

Of course with anything there are certain rules and regulations on what qualifies and how the transfer must be done, but as long as you are purchasing another property for similar purposes, you can hold on to that tax money to reinvest it into the new property. That’s right, the IRS says keep that money and make more money with it.

You still owe the tax, but you don’t have to pay it now. You are simply deferring the tax. When you sell the new property, as long as the process doesn’t repeat itself, you then have to pay the IRS the gains tax on both sales. A situation like this is simply a gain on paper and nothing more, as no money has landed in your pocket.

What if the new property costs less than the new one, do I still have to pay the taxes on the difference?

If you are planning on building on or improving the new property with the proceeds of the sale, you don’t have to. The same holds true if you don’t have a new property in mind when you sell the old one. Simply hold on to the money and wait for the time to be right.

The exchange doesn’t have to happen right away, and it doesn’t matter when it happen for that matter. It can be before, during or after, as long as the proceeds are used to purchase another property.

A 1031 exchange is a very simple procedure that can help small business, and keep them from going under just because a small business purchase carries so much tax overhead.

Don’t give the IRS a free loan on something that might not be there in the end. Take the time to explore you options before you just start handing your money out. The IRS gets plenty of free loans throughout the year; you don’t have to be another entity to add to that pot.

Take the time to consult with an attorney or a qualified intermediary, they will be able to help you understand the ways a 1031 Exchange can benefit you and your business.

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