What Do Investors Know About IRS 1031?
December 16, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
It is a well known fact that the IRS 1031 has some major benefits for investors; however, there are other lesser known facts that can also be used to an investor’s advantage. One of those is the reverse exchange, a fairly recent development that allows investors to purchase their replacement property before selling their original property. This is especially useful in a market where property sells quickly. Of course, since investors cannot hold the title to both properties at the same time, a Qualified Intermediary (also known as an Accommodator) has to hold one of them, making this a more expensive transaction than the traditional forward exchange.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, “like kind” property.
An IRS 1031 may also be completed by an investor with US real estate investment property in a few unique ways that still allow the property to be considered “like kind.” Oil and gas investments and water and mineral rights are a few of the avenues that might be allowed as a 1031 exchange, as well as TIC (tenant-in-common) investors that share a fractional part of a large commercial building.
There are also times when foreign exchanges are considered to be “like kind” properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another 1031 like kind exchange that can be used to take advantage of the IRS 1031 code is called an improvement exchange, or as it is also known, a build-to-suit or construction exchange. A QI will hold the title on a replacement property purchased by the investor for an amount less than the value of the property they are selling. The owner then has 180 days to make repairs and improvements that will bring the value of the replacement property up to par, enabling the investor to take advantage of the entire tax deferral amount.
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