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The 1031 Exchange - Valuable Wealth Building Tool

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Real estate is considered the most valuable wealth building way to accumulate assets. In today's real estate market, it might be the best time for take advantage of some of the good deals in the market. The buyers and investors can take advantage of the program offered by Treasury Department called 1031 tax-deferred exchange. No gain or loss is recognized if property held for productive use in trade or business or for investment, is exchanged solely for property of a like kind to be held for investment. Any property held for this reason can be exchanged for like-kind property. Like-kind refers to the nature of the property. For example a townhouse an be exchanged for a single family rental, a commercial office could be exchanged for shopping center...any combination will work and this provides a great flexibility to the exchanger.

Here are the few reasons why you should consider using 1031 exchange for your transaction. First, you defer about 15% to 28% in Federal taxes and about 9% in State taxes. Second, you can leverage yourself by having more money to put down on a property or acquire multiple properties. Third, you may exchange today and sell in the future when capital gains are more favorable. Finally, you can take advantage of the "Time Value of Money". Your dollar today is worth a lot more than tomorrow. You can defer your tax liability to years from now.

So, this is how it works. You find a buyer to buy your property. The ownership is immediately transferred, however, we act as your qualified intermediary and the proceeds are wired to an escrow account specific to your transaction. The funds are held in a money market account and will accrue interest. Then the exchanger (you) has 45 days to locate and identify a replacement property and complete the transaction within 180 days. After the initial 45 days has passed, the Exchanger may not change their Property Identification list and must purchase one of the listed replacement properties or the exchange fails.

To avoid the payment of capital gain taxes the Exchanger should follow three general rules: (1) purchase a replacement property and or properties that is the same or greater value as the relinquished property, (2) reinvest all of the exchange equity into the replacement property and (3) obtain the same or greater debt on the replacement property as on the relinquished property. The Exchanger can offset the amount of debt obtained on the replacement property by putting the equivalent amount of additional cash into the exchange.

The Exchanger must sell property and or properties that are held for income or investment purposes and acquire 1031 replacement property that will be held for income
or investment purposes. IRC Section 1031 does not apply to exchanges of stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidences of indebtedness, certificates of trust or beneficial interests, or interests in a partnership

For more information on the 1031 exchange visit www.LegalCreation.com

 

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