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A section 1031 tax deferral allows an
investor to sell a property, then reinvest the proceeds in a
new property and defer all capital gain taxes. Specific
conditions for the exchange state that it must be of
“like-kind” and must take place within 45 days of the close
of the sale. To understand more about how this exchange
works, consider the following example: •If an investor has
a $200,000 capital gain and incurs a tax liability of
$70,000 in combined taxes when the property is sold, only
$130,000 remains to reinvest in another property.
•If the investor had, for example, a down payment of 25% and
a loan-to-value ratio of 75%, the seller would only be able
to purchase a $520,000 property.
•If the same investor chose a 1031 exchange, however, and
had the same down payment and loan-to-value ratio as above,
the entire $200,000 of equity could be reinvested in an
$800,000 purchase of real estate.
The exchange offers a powerful protection for investors
from capital gain taxes. However, knowledge of what
qualifies for a 1031 exchange, and how it works is crucial
to receive the full benefits that it can offer. For example,
not all real estate qualifies for the exchange. Business
property and investment property are the only types that
will qualify for the tax deferral.
Both the property sold and received must be of “like-kind”,
which is often mistaken to mean the exact types of
properties. The like kind provision for real property is
quite broad, and includes land, rental, and business
property. A
1031 exchange may actually be mixed as to type
and still be like-kind. For example, you may exchange land
for a duplex, or a commercial building for a retail store.
The like-kind provision for personal property is more
restrictive.
One difficult aspect of making a 1031 exchange is finding a
new investment property within the 45 day limit. The IRS is
very strict about complying with the restriction and rarely
allows extensions. Once a replacement property has been
found, the next challenge comes in obtaining the extra
capital needed to complete the exchange.
Fortunately, there is an easy way to overcome that
challenge. Obtaining a bridge loan is an easy and effective
way for a commercial borrower to finance a property for a
short period of time. Bridge loans are usually offered for
terms of 12-36 months, just the amount of time that a
property owner would need for a 1031 exchange.
Visit
Security National Capital today to learn more about a
1031 exchange.
Michael Southard is the Vice President of Security
National Capital.
Article Source:
http://EzineArticles.com/?expert=Michael_Southard
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