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1031 Exchanges - Good For Investors, Good For the U.S.

The 1031 exchange is a tactic commonly used by investors in real estate and other property to indefinitely defer tax liability on the sale of a property. This is done by transferring rights to a piece of property that one plans on selling to an intermediary, who holds the funds gained from the sale of the relinquished property and uses them to purchase a replacement in compliance with the rules set out in Section 1031 of US tax code.

While the present popularity of the 1031 exchange may give you the impression that Section 1031 only recently came on the scene, this is untrue. In reality, the history of the 1031 stretches all the way back to 1921, although at its conception, it was significantly different than what we today think of as an exchange. The 1031 Exchange truly came into its own in the 1970s, which saw many significant changes in the way in which these exchanges were conducted. These changes paved the way to a more powerful conception of the exchange process and generated increased interest among real estate investors.

The capital gains deferral an exchange provides to the investor might, at first glance, seem to be a gift from the government, but it is, in reality, more like an interest-free loan. This is because there is an expectation that the investor will repay the money gained from the deferral by paying capital gains taxes on the eventual sale of a replacement property. Additionally, this “interest-free loan” may be kept indefinitely; an investor may conduct any number of exchanges before ultimately making the decision to sell outright, at which point capital gains taxes must be paid.

The 1031 exchange represents a mutually advantageous agreement between investors and the U.S. government, profiting the country's economy as a whole in addition to the individual investor. In viewing the transfer of value in an exchange as representing a continuation of an existing investment rather than as a separate transaction liable for taxation, investors are given the opportunity to move their funds to the most profitable investments possible. This, in turn, boosts the economy by encouraging the growth of new jobs.

As with anything, the 1031 exchange has detractors. Some advocates of change in Section 1031 will argue that the tax-free profit gained by to the investor in the exchange process creates an unreasonable advantage over other buyers. Another common concern is that the strict deadlines imposed on steps in the exchange process could engender a frantic rate of buying, with a resultant increase in the cost of replacement properties. These criticisms, however, are only tenuously based in reality, and the odds that Section 1031 will see noteworthy changes in the near future are quite low. In general, most will agree that the 1031 exchange is greatly helpful to all involved, as it allows investors greater profits on the sale of their property while also encouraging the creation of jobs and therefore the greater good of the U.S. as a whole. There is little doubt that the 1031 will remain a mainstay of the investment business for years to come.

Article Source: http://www.articleresourceindex.com

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