IRC 1031 Code
The Internal Revenue Code 1031 (IRC 1031) property exchange refers to the process of allowing an investor or property owner to exchange a property for another property as a way to defer payment of state and federal capital gain taxes. Of course there are other components of the code, including the type of properties that qualify and the amount of time allowed in which to complete the entire transaction, in order for the IRS 1031 exchange to be approved.
A 1031 like kind exchange is not really an avoidance of tax; it is more of a rollover of equity of like properties so that you can continue to build wealth through investing in real estate. Ever since 1921 there has been an exception in the Capital Gains tax code that states the tax can be deferred if the investment property is not sold but exchanged instead.
The idea behind the IRC 1031 is that a taxpayer should be able to get rid of income or investment property and obtain a replacement income or investment property without having to incur what could be a rather large capital gains tax amount. The 1031 exchange rules have changed very little since that time but there are some basics and tips that are very helpful to know.
This tax deferred 1031 exchange is much more than just selling an investment property, such as a rental house, and then turning around and buying another rental property. There are some very creative possibilities with this code. Perhaps you should consider purchasing a property in the area where your child is going to attend college, holding it as a rental, and then completing a 1031 exchange after they have graduated. Many investors are leery of selling a property after making a substantial gain in the market, so opting for a 1031 property exchange would allow them to exchange a residential property for office or business rentals.
Usually, an investor will begin to feel like they are ready to cash out, slow down and maybe even retire, so they may start to look around for an area that they would enjoy spending the retirement in. In order to use the IRC 1031 property exchange it does not matter if the property they own is a rental house, warehouses, office building or land, as they can still locate a property in whatever beach resort or mountain community they like and purchase it for the future. Since they must use it as an investment, they simply rent it out for awhile and then later use the conversion option to move into the previously rented property without having any tax obligations due.
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