1031 EXCHANGE
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A tax deferred exchange is simply a method by which a property owner trades 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, the tax on the transaction is deferred until some time in the future.
Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The Requirements of Section 1031 must be carefully met; however, when an exchange is done properly, the tax may be deferred.
In an exchange, a property owner simply disposes of one property and acquires another property. The transaction must be structured in such a way that is, in fact, an exchange of one property for another, rather than the sale of one property and the purchase of another.
A sale and a reinvestment in a replacement property are converted into an exchange by means of a exchange agreement and the services of a qualified intermediary - a fourth party who helps to ensure the exchange is structured properly.
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