The Evolution of 1031 Exchange Provision
Investors use the 1031 tax exchange rules to put off payment of taxes from the sale of a property for a long time. This can be seen when the person who has sold their property goes ahead and buy a similar one, using the amount they just made, without necessarily having to pay the required taxes immediately.
To think that 1031 was a recent provision would be misleading. Research shows that it came into being in 1921. Time has seen the concept adapt to changes in the market. The the 70s was the period when most changes to the concept were made, as well as the systems that governed it’s administration. These changes greatly revised the 1031 process, thereby attracting more real estate investor attention.
When you look at the capital gains tax deferral extended to the taxpayer through this provision, it looks like a bonus. This is not the case, as it is more of an interest-free loan, as the taxpayer still has the burden of paying back the amount generated from the tax deferral, through the payment of capital gains taxes when they will sell the similar replacement property. Investors are allowed to hold off payment of this loan for a long time. They basically have the right to go ahead and do more exchanges with the property, until a time when they are ready to sell the property, on which they will be expected to pay the capital gains tax.
Section 1031 is there to benefit both the government and the investor. The provisions therein are for the consumption of the country’s economy and the taxpayers as well. The funds required for an exchange to occur are not viewed as a new transaction, but as the progression of the initial investment at a later stage, thereby negating the need to impose fresh tax levies on them. There is no tax levied upon the exchange. Investors are left with the financial muscle to go ahead and profit from the most lucrative investment options available. The ripple effect is more jobs for the people.
There are those who do not have faith in the 1031 exchange rules. They are calling for a change in the section, because they argue that the tax-free funds is not fair, and puts certain investors at an unfair leading position. Others see the strict processing timelines of the provision makes people rush to buy property to enjoy it, which then becomes a problem when it comes time to find replacement properties. These arguments have no real basis, and there is very little chance that any changes will be made to the 1031 exchange process or concept anytime soon. This provision, realistically speaking, is beneficial to all who are affected by it. The taxpayers get access to a larger profit, while the rest of the citizens get to access more job opportunities. This means the provision will be in force for the foreseeable future.