The Evolution of 1031 Exchange Provision
Those looking to minimize the costs of acquiring a property after the sale of another one can use the 1031 tax exchange provision. This is achieved when the sale of a property sees the rights to it transferred to another party, and the seller proceeds to buy another property from the proceeds of the previous sale.
1031 may seem like it has only recently become more popular, but this is not the case. The reality is it was conceived as early as 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. These changes greatly revised the 1031 process, thereby attracting more real estate investor attention.
At first glance, the capital gains tax deferral the exchange gives forth to the taxpayer appears to be an additional income. What it closely resembles is an interest-free loan, which the taxpayer can put off paying for the time being, but will eventually have to pay back. The loan can be kept on hold for as long as possible. After the initial selling, the taxpayer can participate in more sales using the property, until they are ready to dispose of it, at which time they can pay the tax.
It is not just the investor who enjoys the rewards of this Section 1031, but the authorities as well. The provisions therein are for the consumption of the country’s economy and the taxpayers as well. The the system works by looking at subsequent exchanges and the amounts involved as part of the first transaction, which was tagged for taxation, and leaves the rest free of that burden, thereby avoiding a scenario where all exchanges have to undergo taxation. There is no tax levied upon the exchange. Investors are left with the financial muscle to go ahead and profit from the most lucrative investment options available. The economy benefits when there are more jobs available for the citizens.
This provisions do not enjoy the support of everyone. 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. There are those who have predicted a sharp increase in demand for replacement properties, when the rigid deadlines that accompany the exchange process forces people to hurry with their selling process. 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. This provision, realistically speaking, is beneficial to all who are affected by it. Taxpayer can access more profits, while the rest can access more jobs. There is little chance the provision will ever be scrapped.