If you've come here you may have heard of the 1031 Exchange. This is an option to defer taxes on the sale of property. It allows investors to sell one property and reinvest the money in another, without paying taxes on the proceeds of the original sale. In this article, we tell you everything you need to know about tax deferral and how the 1031 exchange works.

What Are Deferred Taxes?

Deferred taxes are those taxes that companies have to pay or not pay in the future. Why? The reason is simple; because of transactions that are not recognized in the financial statements of the last tax return. However, such returns will be taken into account in subsequent tax returns.  In other words, they are tax effects that have been recorded as expenses or income, but have not been included in the financial statements. Even so, they will be included in future returns.  

The 1031 Exchange

One option for deferring taxes on the sale of property is the 1031 exchange, also known as a "real estate exchange". This exchange allows investors to sell one property and reinvest the money in another, without paying taxes on the proceeds of the original sale. The 1031 exchange is based on the idea that the sale of one property and the purchase of another are a single event. In this way it is possible to defer the payment of taxes until the replacement property is sold. By deferring the payment of capital gains taxes, this financial instrument allows investors to maximize cash flow and increase long-term profits.  

Qualified Agent

The Internal Revenue Service (IRS) makes it mandatory to engage a qualified intermediary to conduct a 1031 Exchange. Such intermediary must be affiliated with the Federation of Exchange Facilitators (FEA) and must provide a performance bond. This person will be responsible for holding the exchange funds in a separate account until the transaction (sale and purchase) is completed. By working with a qualified intermediary, investors can be assured that their exchange will go smoothly.

1031 Exchange: Foreign Investor Considerations

The 1031 exchange is also available to foreign sellers, but FIRPTA imposes an additional requirement to avoid the 15% withholding. The seller must obtain an IRS-issued Withholding Certificate or a Notice of Foreign Seller. He should also plan ahead to obtain an ITIN and apply for the withholding certificate.  It is important for the foreign seller to seek the assistance of a qualified intermediary and experienced advisors early in the sales process. This will greatly assist in the closing and U.S. tax filing process. At Voraus, we know that tax requirements are complicated and confusing for many companies. That's why we are here to help you understand them better and avoid unnecessary fines and penalties. Want to make sure your company is complying with all tax obligations? Don't wait any longer and contact us today for a personalized consultation with our experts.   At Voraus, we know that tax requirements are complicated and confusing for many companies. That's why we are here to help you understand them better and avoid unnecessary fines and penalties. Want to make sure your company is complying with all tax obligations? Don't wait any longer and contact us today for a personalized consultation with our experts.