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Ballard
Escrow Inc.
5900 24th Ave NW
Seattle, WA 98107
Tel 206 781 1002
Fax 206 781 1025
email
Business Opportunity Transactions
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1031
Exchanges
A tax deferred exchange is 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. In an exchange, however,
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.
In order to successfully defer the tax on the transaction, the requirements of Section
1031 and other sections of the IRS Code must be carefully met. The transaction must
be structured in such a way that it is, in fact, an exchange of one property (the
relinquished property) for another (the replacement property), rather than a sale
and subsequent purchase of properties. This is accomplished through the use of an
exchange agreement and the services of a qualified intermediary - a third party who
helps to ensure that the exchange is structured properly.
Allowing a taxpayer to defer the tax in an exchange encourages investment and allows
the taxpayer to trade up to a higher-valued investment property or to multiple investment
properties, without having to pay federal income tax on the sold (or relinquished)
property. A tax deferred exchange enhances the flexibility of a real property investor,
by allowing the investor to change properties in accordance with an investment strategy,
while deferring the payment of federal income taxes until such time as the investor
chooses to liquidate his or her real property assets.
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