Benefits of 1031 Exchange Provision
Those looking to minimize the costs of acquiring a property after the sale of another one can use the 1031 tax exchange provision. This is achieved when the sale of a property sees the rights to it transferred to another party, and the seller proceeds to buy another property from the proceeds of the previous sale.
1031 may seem like it has only recently become more popular, but this is not the case. The reality is it was conceived as early as 1921. With time, the concept has gained new features, and shed some older ones. Most of the evolution to the provision and how it was administered was done in the 70s. These changes greatly revised the 1031 process, thereby attracting more real estate investor attention.
At first glance, the capital gains tax deferral the exchange gives forth to the taxpayer appears to be an additional income. It should not be seen as such because the taxpayer will still have to pay that tax the day they will dispose off of that property. The loan can be kept on hold for as long as possible. After the initial selling, the taxpayer can participate in more sales using the property, until they are ready to dispose of it, at which time they can pay the tax.
The government and the investors all benefit from this section 1031 provision. The provisions therein are for the consumption of the country’s economy and the taxpayers as well. The the system works by looking at subsequent exchanges and the amounts involved as part of the first transaction, which was tagged for taxation, and leaves the rest free of that burden, thereby avoiding a scenario where all exchanges have to undergo taxation. The exchanges remains fee from taxing. Investors are left with the financial muscle to go ahead and profit from the most lucrative investment options available. The economy benefits when there are more jobs available for the citizens.
There are those who do not have faith in the 1031 exchange rules. Those who wish to see the concept changed to say that the tax-free profit the taxpayer receives is not fair to the rest, and puts them at an uneven advantage. There are those who have predicted a sharp increase in demand for replacement properties, when the rigid deadlines that accompany the exchange process forces people to hurry with their selling process. Most of such arguments do not carry any weight, meaning the exchange provision is here to stay. An objective view of the provision reveals more benefits for all parties concerned. The taxpayers get access to a larger profit, while the rest of the citizens get to access more job opportunities. There is little chance the provision will ever be scrapped.
Reference: The Essentials of Guide – The Basics