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Prior to the establishment of Internal Revenue Service Code 1031, there were more limited opportunities for investors to defer the payment of capital gains taxes on the sale of investment real estate. Today, however, the Internal Revenue Service offers a 1031 exchange option.
Under this code, investors are permitted to defer the payment of capital gains tax on investment properties providing that they meet the strict criteria of the Internal Revenue Service.
The 1031 exchange option allows investors to exchange — in the tax sense — their relinquished property for a like-kind property. The like-kind property can take many forms and does not need to be the same type of investment property as the one relinquished. Allowable replacement properties include office buildings, retail centers, multi-family homes, industrial buildings and even vacant land.
For many investors, however, like-kind property is taking the form of a tenant-in-common investment. With this strategy, investors add a fractional ownership interest to their real estate portfolio. By pooling resources with other investors, under the guidance of a tenant-in-common sponsor, these investors have access to institutional-quality real estate. Additionally, if a sponsor is chosen carefully, the investors will benefit from the sponsor’s extensive real estate experience and due diligence on the property.
For more information on the 1031 exchange option, please click here.
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