Understanding Section 1031 Tax-deferred Exchange
Every
individual who wishes to take full advantage of the benefits of
Section 1031 Exchange must understand that each transaction is
different. Although there are rules
and procedures that apply to everyone in general, successfully
accomplishing one's investment objectives entails exercising due
diligence and consulting the right professionals for some much needed
legal and fiscal advice.
Unlike
regular transactions where a property owner is taxed on gains earned
from sales, tax on a Section 1031 Exchange gain is deferred. This is
possible because the Internal Revenue Code's Section 1031 states that
an exchange of property that is held for trade, business, or
investment purposes recognizes neither gains nor losses.
Theoretically, a taxpayer's investment did not change in any other
way other than its form, so it would only be fair for him or her not
to be obligated to pay tax.
This
should not mean, however, that a Section 1031 exchange is tax-free.
It is only tax-deferred and when the time comes for the replacement
property to be sold, the gain from the original transaction, in
addition to any other gain realized since the replacement property
was purchased, will be subjected to tax just like every other form of
transaction.