A “1031 Exchanges” or Striker exchange, is a mechanism used to defer(not avoid forever) capital gain on the sale of investment propertyuntil a later date — usually, a date in the future when the owner’sincome is smaller (i.e, retirement) and therefore the tax “hit” issmaller. In effect, the government gives you a no interest loan byallowing you to keep the capital gain in circulation and buy a newproperty. The idea is that you hopefully will make even more money andeventually pay the government more taxes, but a good tax accountant canavoid this.
The key here is investment property — it can’t beused on your personal residence, but can be very useful if you havestarted to build your real estate investment portfolio. Under veryspecific circumstances, you can convert a personal residence to aninvestment property or an investment property back to a personalresidence, but the tax laws changed pretty significantly on this in2009, so be sure to discuss all of this with your tax adviser beforeattempting this.
The details of the exchange must be handledvery precisely, so in addition to escrow a 1031 Qualified Facilitatorcompany is employed to be sure all IRS requirements are satisfied andyour gain is securely held until you roll it into your next property.When you sell an investment property, you can do a Deferred Exchangewhich allows you a certain narrow window of time to identify andpurchase a replacement property, or you can purchase the replacementproperty at the same time as the sale of the old investment property. The new property must generally be worth more than the old one, or thedifference is immediately taxable, but you can for example buy threeless expensive properties as long as the total of the properties isgreater than the sale price of the exchanged property. The law alsorequires that you finance at least an equal amount on the new propertyas what you owed on the old property, or you will have to pay taxes onthat amount as a virtual gain.
To find out more details, you can go here to the Qualified Facilitator’s Professional Trade Association website.