Simple Application Of The Irs 1031 Exchange Law
The IRS 1031 exchange law allows for the exchange of one useful property for another useful property of like kind and value while deferring the taxation of the sale of the initial property indefinitely. This means that a land parcel can be exchanged for another land parcel, a building for another building, a truck for a truck or other vehicle, and cattle for other livestock. The uses of the IRS 103.1 exchange law are immense and the benefits are endless. There is little wonder as to why so many companies participate in IRS 1031 exchange processes every year.
The IRS 1031 exchange law is named such for the section of the law manual that the IRS distributes and follows. The IRS 1031 exchange law states that no gain or loss shall be recognized when incurred during a like kind exchange of useful property. This is to mean that provided there is no profit posted as taxable income from the sales of profit and a replacement of the property is obtained of like kind, there will be no taxes taken out of that sale at that time. This is not absolution of taxes, but rather an indefinite deferral of taxes.
A word used often in the IRS 1031 exchange law is like kind. Like kind indicates the type of property, not the value of the property. This is to say that cattle cannot be exchanged for land, a car for cattle and so forth. The property being exchanged has to be of a similar, or like, kind. As stated, this exchange does not imply or limit the value of the properties being exchanged. This is meant to mean that the property replacing the former property should be of equal or greater value than the original property. This is so that there is no profit gained from the exchange, making for no taxation required.
With the IRS 1031 exchange law deferring the taxation of a property sale provide there is no profit and a replacement property is purchased, a higher value of property can be purchased by using the sale money in its entire amount as a down payment towards the loan needed to complete the rest of the sale. An example of how the IRS 1031 exchange law is able to increase the amount of a down payment and subsequently the amount possible to purchase, one only need to do a few calculations.
If a property was sold for $100000, with normal taxation laws in effect, the tax on that property could be $35000. This would leave $65000 for the down payment. Assuming a 25% down payment was made, a loan with this amount would be worth $260000. Assuming a 75% loan verse real value, the property would be worth $325000. Given the same circumstances, an IRS 1031 exchange law sale at $100000 could use the entire amount for a down payment, netting a loan of $400000. Assuming the same loan to property value, the property amount would be worth $500000. This is a $175000 difference between the properties.
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