The answer to why some investors
are successful in dealing with real estate and why others find it difficult to
earn positive returns from its dealing is finally out. It is through the
incredibly powerful tool of 1031 Exchange that some investors have turned out
to be financially successful. The use of this tax-deferment strategy is on the
rise with more investors getting aware of its potential benefits. So, if you
want to benefit from the use of such strategy, you need to know what a 1031
Exchange is all about besides getting aware of the factors that require attention
to get the most out of it.
What is a 1031 Exchange?
The 1031 Exchange got its name
from Section 1031 of the U.S. Internal Revenue Code. Also referred to as “Like-Kind
Exchange” or “Starker”, it allows investors to defer the payment of capital
gains tax arising from the sale of a real-estate property by purchasing a
“like-kind property” of equal or higher value with the sale proceeds of the
previously sold property. Most property swaps are taxable for capital gains,
but if it meets the requirements of a 1031 exchange the tax arising from a
real-estate sale can be deferred to a later date.
Most successful investors take
advantage of the 1031 exchange because it provides more benefits that opting to
avoid tax. There is no limit to the number of times this strategy can be used
but the user must be aware of its rules and regulations before taking it on.
Who are its eligible users?
A 1031 Exchange is similar to
that of a traditional tax-deferred retirement plan. As long as the money
generated from an income producing asset continues to be reinvested in similar
real-estate properties (within the ambit of the 1031 exchange rules), the
capital gains tax can be deferred. The primary qualifiers for a 1031 exchange
are individuals, S corporations, C corporations, LLCs, and Partnership firms.
Which investment qualifies?
Property held for productive use
in business, trade, or investment can be exchanged for like-kind property. For 1031
Exchange Investments in Wyoming like-kind property is defined as real
property located within the United States and certain territorial properties.
Such as, raw land can be exchanged for a shopping center, single-family rental
for a duplex, etc. But a personal property like a commercial building cannot be
exchanged for a share or raw land for construction equipment.
Which investment does not qualify?
In 1986 there were some revisions
in the IRC 1031 excluding certain property interests from being exchanged. This
includes –
§ Personal
residence, other than the portion used for business or investment purpose;
§ Stock-in-trade;
§ Stocks,
notes, bonds, and securities;
§ Goodwill
of a company or partnership interests;
§ Certificates
of Trust
Conclusion
The ultimate motive behind 1031 Exchange Investments in Wyoming is
that since the taxpayer is exchanging one property for another like-kind
property with the same sale proceeds there is no gain or loss arising in his
hand that is liable to income tax.
