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Real Estate Tips: Articles on the Flagstaff Real Estate Market [January 2008]

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The 1031 Tax Deferred Exchange

With 2008 upon us I feel compelled to once again inform investors of the benefits of the 1031 Tax Deferred Exchange.  I have written about this gift from Uncle Sam to investors in the past and feel that with each New Year it is a good time to review what a 1031 exchange is and how it can help your real estate portfolio.  If you own investment real estate it is imperative that you familiarize yourself with this law.

Section 1031, of the Internal Revenue Code, offers real estate investors an opportunity to build wealth and save taxes. By completing an exchange, you the investor (Exchanger) can dispose of investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid, and leverage all of the equity into the replacement property.  As an investor you can accomplish virtually any investment objective with exchanges including greater leverage, diversification, freedom from joint ownership, improved cash flow, and/or property consolidation.

If you are thinking about selling an investment property you should consider a 1031 Exchange.  An Exchange offers an investor an opportunity to reinvest the federal capital gains that would normally be paid to the IRS and put that money to work for yourself.  Essentially the exchange should be thought of as an interest free loan from the IRS; one in which the principal may be increased through subsequent exchanges and may never require repayment, if you plan properly.

As with any tax issue the IRS has many rules that must be carefully considered before you enter into an exchange.  You should visit with your accountant to understand the rules of a 1031 exchange.  Title Company's in Flagstaff are affiliated with firms that provide investors with Qualified Intermediary services for Tax Deferred Exchanges under Section 1031.  These firms can provide you with the information you need to get started. When you are ready, your realtor can assist you with the sale of your current real estate, and help you find a suitable property for replacement.

Mary Monday is an Associate Associate at RE/MAX Peak Properties. She can be contacted at (928) 779-9090 or Mary@MaryMonday.com.

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“Mary Monday made the experience of selling my home a genuine pleasure. It delights me to know there are true professionals left in the world.”—BS