One of my favorite explanations for why the Internal Revenue Service allows taxpayers to sell a property and defer the capital gain tax on the sale of that property through the use of a Section 1031 like-kind exchange contains the words in the subject of this article.
The explanation goes like this: the IRS allows the taxpayer to defer the payment of capital gain taxes on the
sale of a property in an exchange because the investment itself does not change, merely the form of the investment changes. When you think about that, it is really quite incredible that this great wealth-building tool is available to us. Investor Jones invests $10,000 to purchase a $100,000 duplex. After ten years, he sells the property within a Section 1031 tax-deferred exchange and purchases an 8-plex. He might have increased his equity in the duplex to $40,000 during those ten years and paid $400,000 for the 8-plex, but the IRS does not recognize the gain if done properly because only the form of the investment changed, not the investment itself. In another ten years (or sooner, if he chooses), Investor Jones can repeat the process. In fact, he can defer his capital gain taxes for his entire life if he wishes. And at his death, his heirs inherit his properties at their “stepped-up basis.” (I.e., their fair market value at the time of his death.) If those heirs choose to sell at that time and the properties sell for their fair market value, there is no capital gain tax to be paid because there was no gain from the stepped-up basis.
Section 1031 is an amazing benefit that is available to all taxpayers who own property purchased for investment or used in the pursuit of a business or a trade. Be sure that you and your clients are taking advantage of this benefit when a desire to change the form of an investment occurs.
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If you have questions about Section 1031 like-kind tax-deferred exchanges, please consider IOWA EQUITY EXCHANGE as your source for answers. We handle all types of exchanges. Experience The Power of the Tax-Deferred Exchange! Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
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Copyright © 2008 By Ken Tharp, All Rights Reserved. * Merely the Form of the Investment Changes… * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
