1031 exchange investment: saving money with real estate

On April 25, 1991, the IRS issued the deferred exchange regulation-Reg 1.1031(k)-1, known as IRC 1031 Exchange. The IRC 1031 exchange tax code allows taxpayers to defer all of the capital gains taxes resulting from the sale of investment property when following the I.R.S. guidelines, and use the proceeds from the sale to buy more investment property within 180 days of the close of the sale.

This means that the savvy real estate investor can reinvest the proceeds they would otherwise lose to capital gains tax, but only if they will use the extra money to buy more investment property for the purpose of making more money as long as they follow the guidelines found in the IRC 1031 Exchange. This can be done within and between all classes of real property anywhere in the United States.

The single most effective and profitable method to put money to work for you, is in the periodic use of IRC 1031. In fact, smart investors almost never sell, they continue to exchange until their will is probated and their heirs reap the benefits of their labors. However, under the IRC 1031 Exchange, personal residences do not qualify because the section is intended to cover assets held for productive use or investment purposes only. Interests in a partnership are also ineligible. Like-kind commercial real estate exchanges do not necessarily need to be of the same quality of property. What that means is that an investment in undeveloped land may be exchanged for one in an office building..

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The majority of 1031 Exchange companies do a great job. However, the recent increase of 1031 Exchange company rip offs have real estate investors wary of the 1031 exchange option as a whole. The only consolation investors have against possible wrongdoing is to perform thorough due diligence on the exchange company they are choosing to do business with. There are many things to look for when considering 1031 exchange companies.

Look for completely segregated accounts. While a 1031 Exchange company's funds are not actual trust funds, there is no reason they should be treated with any less security than a trust fund. Funds are combined by 1031 Exchange companies for their benefit and not for the customer. If the funds are co-mingled, this can be a red flag.

Don't be sidetracked or confused by insured or fidelity bonds. What a real estate investor needs to require is joint control over the segregated account. Fidelity bonds and insurance may provide some source of reimbursement if funds are lost. However, the real estate investor needs the money to be there when they are ready to complete the exchange. The only way to make sure of that is to have some control over the funds during the exchange period. The size and financial strength of a 1031 exchange company might seem like an over-riding factor, but there is no assurance the funds will be there when the investor needs them without this type of precaution.

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