1031 Exchanges & Real Estate Investments


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1031 Exchanges (Section 1031)


 
1031 EXCHANGES (SECTION 1031)

Internal Revenue Code (IRC) Section 1031, offers an exceptional wealth-building opportunity, by allowing real estate sellers to defer capital gains taxes by exchanging sold property for "like-kind" replacement property. Guidelines governing 1031 exchanges are explicit and deadlines must be met in order for the exchange to take place. These mandated timelines can be daunting to many investors leading to blown exchanges, rushed due diligence and the acquisition of undesirable property.

BUILD WEALTH BY DEFERRING TAXES

Tax deferred exchanges, as defined in IRC Section 1031 offer investors one of the last great opportunities to build wealth by deferring taxes. By properly completing a 1031 exchange an investment property owner ("exchanger") may sell their current ("relinquished property") property, use the equity to purchase a different investment property ("replacement property"), thus deferring the capital gains tax that otherwise would have been paid. In order to completely defer the capital gains tax an exchanger should follow three general rules:

  1. Purchase a replacement property of equal or greater value

  2. Invest all of their equity in a replacement property

  3. Replace any debt that was attendant to the relinquished property. Any cash or other benefits that an exchanger receives from the sale of its relinquished property is termed "boot" and may be subject to tax. As a caveat to the three general rules for deferral listed above, an exchanger may offset the amount of debt obtained on replacement property by investing additional cash/equity into the replacement property.

REQUIREMENTS

Compliance with IRC Section 1031 guidelines is facilitated by entering into an agreement with a qualified party prior to the sale of an investor's relinquished property. This Qualified Intermediary ("QI") and the exchanger execute an Exchange Agreement that assigns the cash or other proceeds from the sale to the QI. These funds are held in a separate, secure account and are used by the QI to purchase the replacement property that the exchanger identifies.

Exchange considerations include but are not limited to the following:




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