1031 Exchange
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A tax deferred exchange ("Exchange") is simply a method by which a property owner may trade one property for another without having to pay any federal income taxes on the transaction.

In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an Exchange, some or all of the tax on the transaction is deferred until some time in the future, usually until the newly acquired property is sold. These Exchanges are sometimes called "tax free Exchanges", because the Exchange transaction itself is only partially taxed or not taxed at all.

Exchanges are granted authority under Section 1031 of the Internal Revenue Code ("IRC ยง1031") and the Regulations promulgated thereunder. When an Exchange is conducted in accordance with the Code and the Regulations, the tax on the gain which is realized by virtue of the sale of the old property will be deferred, (not recognized) until such time as the property acquired in the Exchange is sold or otherwise disposed of in a taxable transaction.

In an Exchange, a property owner simply transfers the old property and receives the new property. However, the Exchange must be structured in such a way that it is, in fact, an Exchange of one property for another, rather than the sale of one property and the purchase of another. A taxpayer is deemed to have sold property in a taxable transaction if the rights and interests in the property are conveyed and the taxpayer is in actual or constructive receipt of the proceeds. Consequently, a taxpayer who transfers title to property to the buyer and walks the proceeds across the street to purchase the new property, has sold property in a taxable transaction and will not be afforded the benefits of an Exchange.

The taxpayer may avoid the taxable sale and purchase and qualify for Exchange treatment if, prior to the sale of the old property, the taxpayer enters into an Exchange agreement with a ("Qualified Intermediary"), a fourth party principal who helps to ensure that the Exchange is structured properly and meets all of the requirements of the Code and the Regulations, and pursuant to the Exchange agreement assigns all of his or her rights in and to the sale agreement to the Intermediary.

For more information contact us at 781.449.2727 or e-mail us and we can arrange to have you speak directly to our Exchange specialist.