1031 exchange deals with a real estate transaction. The transaction is realized under the rules of section 1031 of the Internal Revenue Code. A 1031 exchange allows for deferring relevant taxes until a future date or even completely eliminate potential taxes associate with the sale of real estate. 1031 therefore allows the owner to have more money available on an interest free basis, which could be invested and thus allows for a more expensive property.
The term is increasingly being heard across states, with the real property business witnessing an unprecedented boom in recent times. A typical 1031 exchange would involve a property owner trading a property for another like-kind replacement property. It is something similar to how humans used to transact business centuries ago. It is similar to the "barter" system of ancient times, where you would exchange one product for another. 1031 exchange allows for one property in exchange for another like-kind.
When one says like-kind real properties, they could be improved or unimproved properties. However the property in one country and outside the country cannot be deemed to be like-kind. The entire deal to be transacted needs the service of a qualified intermediary, also known as an accommodator, who is a person that holds the funds received from the sale of the relinquished property till the replacement property is purchased. The person also ensures that the rules around 1031 exchanged are abided by both the parties to the deal.
The "boot" in exchange is anything of value exchanged which is not like-kind to the relinquished property. The boot is mostly in form of either cash or mortgage debt. This enables to equalize the transaction. One can get extensive information on 1031 exchange boot tax through online resources. Your personal financial advisor is perhaps best placed to advise you on the intricacies involved in 1031 exchange. It is therefore highly recommended that you get in touch with your personal financial advisor, before you go in for a 1031 exchange.
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