Reinvesting With A 1031 Deferred Exchange
A 1031 deferred exchange is meant to be a way for people to save money while investing in property. This 1031 deferred exchange is a way to avoid the taxing of one's money when selling a property if a property of equal or greater value is purchased. Granted, there can be no profit from the sale in order for it to be considered a 1031 deferred exchange, but that is of little matter when dealing with hundreds of thousands of dollars in property values and taxes. Profit will be made as the property increases in value or is put to use, the profit does not need to be made in the purchasing or selling of the property.
A 1031deferred exchange is meant to be a method in which people can use to sell a property while deferring the taxation of the funds so that all of the funds can go towards the purchase of a new property. This is stated quite clearly in the IRC 1031 (a) (1). This states that any gain or loss will not be recognized in an exchange of property for productive use when the property is exchanged for that of like-kind.
An example of the 1031 deferred exchange law is if an investor were to sell a property for $100,000. Without the 1031 deferred exchange, the taxes on this property would be $35,000 and leave $75,000. This would come directly out of the money that the investor would use to reinvest in another property. This would mean that the investor could get a property loan of $300,000 with a 25% down payment. If a 1031 deferred exchange were to occur, the whole $100,000 could be invested. Which results in a $400,000 loan provided the same 25% was placed as a down payment. This difference is can be more clearly seen when one realizes that the loan is usually only for 75% of the property value, making the first loan, the non 1031 law deferred sale, of $300,000 worth $375,000 and the 1031 deferred exchange worth $500,000. This is a significant increase in values when a 1031 exchange is used.
If the property were of the same value, then the seller who did not use a 1031 deferred exchange law would still be required to make loan payments on the new property because of the taxes placed on the profits from the original sale. The seller who used the 1031 deferred exchange would not have these taxes so there would be no loan payments, just a movement of property.
It should be noted that a "like-kind" exchange does not mean the type of building, but rather the value of the building. This means that an apartment building can be purchased after the selling of a mall. It should also be noted that the sales and purchasing of property do not need to be to the same person. One can sell a mall to one person, buy an apartment building from another, and still qualify for the 1031 deferred exchange.
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