The Wonderful World Of 1031 Investments
Section 1031 is a portion of the Internal Revenue Code that allows investors to reinvest their proceeds from property sales and delay the payments of their capital gains taxes until a later time. This is a very useful tool and can incur substantial savings for an investor if used wisely and properly. Although it is very complicated and requires the use of a qualified expert on the code, and the use of a good real estate attorney, the rewards can be well worth the investor’s while. 1031 investments using the advantages can be quite varied. For example, an investor can use the Tenant in Common option, and through exchanges of like-kind properties, become a partial owner, albeit the owner of a tiny portion, of a large shopping mall, office building or hospital. This will afford him the opportunity of being part of a large investment which otherwise would have been beyond his reach, with the added benefit of no responsibility over the management of the property or any of the other problems associated with these types of holdings.
The advantages to using Section 1031 and 1031 investments are numerous. The largest benefit is the investor’s ability to improve his holdings through subsequent exchanges; utilizing the proceeds from the disposal of unwanted properties to acquire better, more potentially profitable ones. These 1031 investments serve the small investor as well as the experienced real estate investor. By exchanging a property for another property using the guidelines of Section 1031 and the services of a qualified intermediary, an investor can greatly improve his holdings without any initial output of funds. He merely reinvests his holdings. However, the funds acquired from the sale of the first property must be used in their entirely toward the new 1031 investments as required under the Section 1031 code. The initial funds realized can be used toward multiple properties to satisfy this condition.
Land as well as buildings can be acquired as 1031 investments. The only requirement for 1031 investments is that they be like-kind property, meaning they are used for commercial or investment purposes only. Exchanges under Section 1031 are not new, but only recently have they become popular. The rapid dissemination of more information on the intricacies of Section 1031 deferment and the Internal Revenue Code has contributed to this increase in use. Although there are many benefits involved with 1031 investments and exchanges, there are also multiple misconceptions about its use. The stipulations listed in the code are rigid and must be observed to the letter by both the investor and the qualified intermediary, particularly the time limitations imposed on the length of the overall transaction. While exceptions and extensions exist, they are rare, and an investor initiating 1031 investments without the proper documents, funds or properties with the hope of earning an excusal is setting himself up for hefty financial losses and potential criminal implications. Section 1031 exchanges, if unsuccessful or improbable, can be counterproductive, and investors must be aware of the risks involved, especially if they are planning on breaking any stipulations of the Internal Revenue Code.
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