Everything an Investor Should Know About ... - Real Estate Investing

Do you know how you can defer tax on your real estate investments?

Did you know that you can defer taxes in real estate investing? This article talks about 1031 exchanges and the tax deferment benefit. ?If you haven?t done your research on 1031 exchanges here is your chance to start.

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You will often hear real estate pros in the United States refer to 1031 exchanges (from the IRS code). They love these things because they allow real estate investors to defer taxes. But there is much more to it than simply deferring taxes.

First of all we are talking about transactions involving investment or income properties. Secondly, we are talking about deferring taxes when one investment or income property is exchanged for another.

So far, so good. But we are still not out of the woods. These exchange transactions must meet very strict criteria in order to qualify for tax deferral. For example, there are property type and even timing requirements that must be met. And the rules are inflexible. But if you do everything right, the 1031 exchange is a powerful way to leverage and manage your real estate portfolio. So never attempt to complete a 1031 exchange on your own. Always consult a professional expert.

But before you consult with a 1031 exchange expert, you can educate yourself about 3 common terms you will run into. These 3 terms do not cover all you will need to know, but they give you a basic introduction to 1031 exchange terminology.

* Qualified Intermediary

If you think about it, a 1031 exchange involves two transactions. You, the taxpayer, will release one property in the first transaction and then acquire another property in the second transaction. The interesting thing is, you are not permitted to handle the money from the first transaction. This is where the qualified intermediary comes in. This person will take control of the funds in the first transaction and also turn around and provide the funds for the second transaction.

* Like-Kind Property

Basically, the 1031 legal code determines what a like-kind property is. Some types of property exchanges qualify for the 1031 tax deferral and some do not. Consult with a professional to be sure you understand what qualifies and what does not. Ultimately, the properties involved in the exchange must be considered to be like-kind according to the tax code in order to qualify for tax deferral.

* 1031 Exchange Boot

There are actually a number of types of boot. But essentially, if you do not execute your 1031 exchange just right, some portion of your transaction could trigger a capital gains tax. Depending on the type of boot involved, there are specific procedures and strategies your qualified intermediary should advise you about in order to avoid triggering taxes.

This just scratches the surface of 1031 exchanges and common phrases. There is much more to learn and a qualified professional can guide you through the process. But at least now you can enter into a conversation about 1031 exchanges armed with some basic definitions of these common terms.

Article by Patrick Whitehill

Patrick Whitehill is the publisher of INVE$ TING TOOLS & TIPS ? a free weekly newsletter. He provides powerful tools and training for motivated people who seek investing success. To take advantage of this free subscription offer ? including a very special bonus ? go to http://investinghowto.com right now and discover the investing tools you need to succeed.

Source: http://realestateinvesting.com/blog/2012/02/20/everything-an-investor-should-know-about-1031-exchanges/

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