What Is A 1031 Exchange and How Can It Benefit You?
To understand what a 1031 Exchange is, it is crucial to understand where the name originates from, as well as, the tax definitions and rules supporting the exchange. According to the Internal Revenue Service (“IRS”), the Internal Revenue Code (IRC) Section 1031 provides an exception for taxpayers who have sold a property at a gain. This tax rule is intended for use on investment or business properties. The 1031 tax break exchange is only allowable to personal residences after certain circumstances are met. Primary residences typically have other allowable tax breaks on capital gains taxes. After the sale of an asset (a property in this case) a taxpayer would normally be required to pay capital gains taxes on the sale. Capital Gains Taxes are the taxes owed from the profit of a sale of assets. If an asset is held for less than a year after it is purchased and is then sold at a profit, those gains are typically added to the taxpayer’s income. But if an asset is held for over a year, the ‘Long Term Capital Gains” tax rate is applicable. The percentage of capital gains owed per sale is dependent on the tax bracket of the taxpayer. The current rates range from 0% to 20% depending on income.