1031 Exchange

A 1031 exchange is one of the most useful tool in wealth building. The best known 1031 exchange is probably the most commonly used tool for tax deferral in real estate investing. Other names for a 1031 exchange include Starker exchange, tax free exchange, tax deferred exchange trading properties, delayed exchange, like kind exchange.

How is the IRS involved in the 1031 exchange?

Under the IRS internal revenue code (IRC) section 1031, a 1031 exchange allows the complete and indefinite deferral of capital gains taxes and recapture of depreciation. This makes a 1031 exchange a very good asset protection strategy and widely used in all investment circles. If you are not already familiar with a 1031 exchange, read our 1031 exchange explained section to find out the process involved and 1031 exchange rules.

Development of 1031 exchange explained & history of the 1031 exchange explained

The original 1031 exchanges were true exchanges meaning that the owner of a real estate property actually traded his or her property for another similar real estate property. However, as you can imagine, it was rare that one real estate property owner wants the actual property of another real estate investor's. And, even if they did, they rarely agreed on the price. So, the original 1031 exchanges were seldom used.

In 1979, the Starker cases created the legal authority for a delayed exchange. This was referred to as a Starker decision. In contrast to the original 1031 exchanges, real estate property owners would now sell one of their properties and wait up to 6 months before purchasing another real estate property without losing the right to consider the real estate deal a tax deferral exchange.

This delayed purchasing of another property and most importantly the delayed in receipt of funds bothered the IRS initially because to the IRS if the real estate property owner did not purchase another property immediately, the real estate transaction looked like a sale, rather than an exchange. In order to satisfy the IRS, the Starker court allowed the real estate sellers the extended time to find and purchase a replacement real estate property but any actual or constructive receipt of funds by the real estate property sellers would trigger taxes.

• 1031 Exchange Explained
• A 1031 tax deferred exchange step-by-step guide
• 1031 Exchange Rules - the Basics
• Reverse 1031 Exchange – The buy now, replace later strategy
• 1031 Exchange Program and the uncertainty of taxes
• What is Adjusted Basis?, Carryover Basis