Doing Options The Right Way

How Taxpayers View the 1031 Exchange

A 1031 tax exchange is a way in which property investors can indefinitely postpone tax liability from a property that is to be sold. This is possible when the rights to a property are transferred to another party, usually an intermediary, who will then use the amount gotten from the sale to buy another similar property, as outlined in the Section 1031.
To think that 1031 was a recent provision would be misleading. The truth is that it has been in use for a long time, starting since 1921. With time, the concept has gained new features, and shed some older ones. The the 70s was the period when most changes to the concept were made, as well as the systems that governed it’s administration. Those changes are what led to a more robust idea behind the 1031 process, and led to more interest from real estate investors.
The capital gains tax deferral such an exchange affords a taxpayer can initially be viewed as a present from the authorities. It should not be seen as such because the taxpayer will still have to pay that tax the day they will dispose off of that property. The investor can also decide to keep the interest-free loan indefinitely. The payment of the capital gains tax can be made after the taxpayer has used the provision to do more exchanges with the properties, and is now satisfied with the process.
Section 1031 is there to benefit both the government and the investor. It has benefits that the country’s economy will enjoy, as well as the taxpayer. The funds required for an exchange to occur are not viewed as a new transaction, but as the progression of the initial investment at a later stage, thereby negating the need to impose fresh tax levies on them. There is no tax levied upon the exchange. This encourages investors to channel their money into the most profitable investment around. The economy benefits when there are more jobs available for the citizens.
There are those who do not have faith in the 1031 exchange rules. Those who wish to see the concept changed to say that the tax-free profit the taxpayer receives is not fair to the rest, and puts them at an uneven advantage. Others see the strict processing timelines of the provision makes people rush to buy property to enjoy it, which then becomes a problem when it comes time to find replacement properties. These arguments have no real basis, and there is very little chance that any changes will be made to the 1031 exchange process or concept anytime soon. When you take an objective and long-term view, you will realize that the 1031 exchange situation has more benefits than harm to the concerned parties. The taxpayers get access to a larger profit, while the rest of the citizens get to access more job opportunities. All this points to a continued long life of the 1031 exchange process.