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1031
Tax Deferred Exchange
The
last great tax shelter
With
very high rental possibilities, the South Bay is an excellent
choice for your real estate investments. The 1031 Tax Deferred
Exchange is one of the last tax shelters allowed by the
Internal Revenue Service. It is a transaction in which a taxpayer
exchanges investment property for like- kind investment property,
and defers the payment of capital gain taxes. The IRS defines
like-kind property as all real property held for investment
purposes, or the productive use in a trade or business. This
basicallyincludes any real estate held for investment except
your primary residence and second family home.
See
Also Types of 1031 Tax
Deferred Exchanges
There
are some important rules which must be followed to effectuate
a valid exchange:
- The
exchange must be opened before the close of Escrow on
the relinquished (sale) property.
- The
taxpayer must identify the replacement (acquired) property
within 45 days after the close of the
relinquished(sale)property.
- The
taxpayer must close Escrow on the replacement property
within 180 days from the close of the
relinquished property, or, before the date the tax return
filing is due for the tax year in which the
relinquished property was transferred - whichever comes
first.
- The
taxpayer must reinvest all net proceeds into the replacement
property.
- The
taxpayer must obtain a debt of equal or greater amounton
the replacement property.
By
following these rules, the taxpayer shelters capital gains
tax into the replacement property,and defers the recapture
of depreciation tax. This creates more buying power for the
taxpayer than if the capital gains tax was paid. Also, by
deferring the payment of capital gains tax, the taxpayer gets
to invest the taxes into the replacement property interest
free from the IRS. The 1031 Tax Deferred Exchange also avoids
the California Withholding Tax.
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