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Article Date:
October 2009

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How 1031 Real Estate Exchanges Work

Did you know that the payment of income taxes on the disposition of business, rental, or investment real estate is voluntary? Would you like to stop volunteering?


You can. You just need to follow the few simple rules that apply to Section 1031 exchanges.


Section 1031 exchanges are underutilized because they have a name problem. When you hear the word “exchange,” what does that mean to you? What image does it bring to mind?


The dictionary definitions include “swap,” “replace something,” “give something and receive something.” This sounds hard.


The word “exchange” is the problem. The Section 1031 tax-deferred exchange is much easier than a swap. In fact, it might be nothing more than a sale and a purchase.


Nuts and Bolts of the 1031 Exchange


Keep this key point in mind: The Section 1031 tax-deferred exchange is nothing more than a sale and a purchase. To clarify how this works, think of four parties:



The seller of your property (you)


The buyer of your property


The seller of the property you are going to buy as your replacement property


The qualified intermediary who makes your sale and purchase qualify for tax-deferred treatment


Here, in a nutshell, is what happens:



You hire an intermediary.


You don’t touch the money.


You sell to the buyer, ... Log in to view full article.

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