1031 Exchanges, NNN Leases
Defer tax with a 1031 Exchange
Please Note the following article on 1031 exchanges
is not to be taken as legal or taxation advice. It is intended as a
guide to NNN leases and 1031 exchange only. If you require proper advice
consult a legal professional.
Many businesses and investors in property
are not aware of the savings offered by 1031 exchanges to save money
on capital gains taxes. Under
section 1031 of the Internal Revenue Code, federal capital gains taxes
may be avoided (deferred) when an investments or business property is
exchanged as opposed to sold.
1031 Exchange Basics;
- Most sellers of business and investment properties
will pay capital gains (federal) tax of 20% for the appreciation and
25% if any depreciation
less sale cost.
- Most states impose income tax on the sale of business
or investment property, many recognize deferral of such taxes for a 'Like
under Section 1031 (IRS).
- Property exchanged must be an investment.
- Payment of federal capital gains
and most state income taxes is deferred until the property received
in the exchange is sold.
- A sale of investment
or business property must be followed by a reinvestment in another
property, and this must be setup before the property to be
transferred is sold. Failure to have an exchange set-up does not qualify
as a proper 1031 exchange.
- In independent qualified third party (acting
on the investors behalf) must be used to facilitate the 1031 exchange
and satisfy the requirements
bound by the IRS for a valid exchange. Using a qualified intermediary
ensures favorable taxation on income.
- To defer capital gains a property
of equal or greater value must be acquired and all of the previous
properties equity must be invested into the new
- Exchanging property has a 45 calendar day period after closing
in which to find up to three properties for acquisition. After this
investor has up to 180 calendar days to acquire these identified properties.
properties must be of a 'like kind' to another. All real
estate investments are considered of a 'like kind' and you
may acquire an unimproved property for another improved real estate property.
An example of investments not considered like kind would be a helicopter
and a fixed wing plane.
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