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1031 Tax Exchange How to avoid paying taxes using section 1031 and 121 What is a 1031? When you sell property, you pay tax. However Section 1031 of the Internal Revenue Code (IRC) lets you defer the tax. A 1031 Exchange (aka: Starker exchange, tax-free exchange, like kind exchange, delayed exchange, etc.) is a specific transaction that joins the sale of an Old Property and the purchase of a New Property for the purpose of deferring taxes. 1031 is an actual IRS code, NOT a 'loop-hole.' Where loopholes are technicalities around the law, 1031 IS THE LAW, and makes it safe and legitimate for anyone who meets the requirements. Properties that qualified can be bare land, rentals, commercial buildings, and homes other than your primary residence. You can also use the 1031 to buy and sell oil and gas interests, mineral rights, and working or royalty interests. The 1031 is a great tool when used for property that has increased in value or been depreciated for tax purposes. It increases your leverage, flexibility and buying power. The 1031 also lets you change, diversify, or consolidate your investments. How to avoid paying taxes If you would like to avoid paying taxes, you can. Real estate owners can use two different IRS code sections to avoid all, or almost all, of the tax on the sale of their real estate. The Section 121 Code applies to your personal residence. It provides for an exemption of $500,000 of gain for a married taxpayer on the sale of a primary residence (or $250,000 of gain for a single person). In order to qualify for Section 121, the taxpayer (s) needs to both use and own the property as a primary residence for at least 2 of the last 5 years. Code Section 1031 applies to any real estate held for investment purposes, like rental houses, commercial property, or bare land. This allows the taxpayer to defer, or postpone, the payment of the capital gains tax by rolling the gain from the sale of an old investment property forward into the purchase of a new investment property. You can also use 1031 in selling and buying second homes or vacation homes! Used together, these two code sections are very powerful in helping avoiding taxes. Be sure to consult a 1031 Expert if you are considering a tax-deferred exchange transaction. 6 Things to Know About Using the 1031:
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