1031 Tax Deferred Exchange 5 Steps to Success

Written by admin on July 9th, 2011

Article by Isaac Roy

Section 1031 of the Internal Revenue Code generally provides that neither gain nor loss is recognized if qualifying property is exchanged for other qualifying property of a like-kind. In the above scenario, you may defer the payment of 0K in both federal and state taxes if you acquire another investment property with equal or greater debt and equal or greater equity. In other words, if you buy another investment real property for M or more, using all of the net proceeds as down payment, then you may defer the 0K of taxes. Essentially, the government would lend 0K to you, without interest. And you may repeat this deferral and never pay income taxes.First, your beneficiaries that receive your tax-deferred accounts will be subject to making at least RMDs for their remaining life expectancy at your death. Those RMDs or any more money withdrawn each year will be taxed at your beneficiary’s highest tax bracket rate since he’ll probably have a working income too. So, if you use much or all of your tax-deferred funds before you die, then you’re leaving less tax liability for him since your remaining taxable accounts (with their tax basis and lower taxation rates) hold less tax liability to him.These are some helpful tips and investment strategies using 1031 exchanges along with other 1031 “basics” that you should know about. The 1031 tax-deferred exchange is much more than selling a rental house and then buying another rental house. It requires a dedicated focus and guidance from a knowledgeable real estate professional. Today’s sophisticated real estate investor can impact their portfolio dramatically by employing a variety of 1031 exchange techniques.If you are stepping up your portfolio through a series of exchanges over time your full capital gain can be re-invested without tax consequence, resulting in accelerated equity accumulation.Mortgage interest is tax deductible and as you pay off your home, that tax deduction gets smaller and smaller. When your child leaves the house for good, he or she takes that tax deduction along.The tax strategies are conflicting here. It’s like driving down the highway with one foot on the gas and the other on the brake. Don’t catch yourself splitting strategies. Besides, why would you want to be in a lower tax bracket? The goal here is to make you more money, right? Well, if you are in a lower tax bracket in the future, then didn’t the plan fail? Coming into the workforce, I didn’t know the history of taxes. When I was younger it never dawned on me that it would ever be important. Today, the understanding of the unpredictability of tax laws is very important.You may be jumping for joy that Uncle Sam’s cut you a break. It certainly is a generous deal, but as with anything, there are potential pitfalls. You may find that the administration, management, insurance and annual records maintenance fees outweigh the tax deferred savings you would have received — especially if you’re tempted to use your funds before you turn 60.So how did this all come about – what is the history of the tax-deferred exchange?The tax-deferred exchange actually has a rather long and complicated history dating back to 1921. The first income tax code was adopted in 1918 as part of The Revenue Act of 1918, but it did not provide for any type of tax-deferred exchange. The first tax-deferred exchange was authorized as part of The Revenue Act of 1921 when the United States Congress created Section 2021 of the Internal Revenue Code. Between 1921 and 1970, exchanges were always simultaneous swaps between two parties, by the way.With a variable annuity, the investor’s premiums are used to invest in underlying assets, usually mutual funds. During the payout period, income payments made to the investor vary in relation to the performance of the separate investment account. In terms of annuity tax deferral, a variable annuity follows the same procedure as the fixed annuity. There is an accumulation period where growth is compounded tax-free. During the distribution period, gains are taxed as ordinary income.

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