Investors who often deal in real estate may be familiar with the 1031 and the 1031 exchange rules.   The IRS naturally wants a cut of any proceeds an investor makes when they buy a property and sell it at a profit.  However, investors can sometimes avoid taxation through a 1031 exchange.  Under this scenario, the investor would simply rollover the profit from the sold property into a new property of equal or greater value, thereby avoiding taxation on gains from the old property.

In a similar way the tax code section 1035 exchange also follows an exchange rolled over rule.  But instead of pieces of property, the investors hold assets such as annuities, life insurance, or endowments, which are then rolled over into new plans with different holding companies, without facing taxes on any gains.

The reasons the holders of such policies might want to switch and take advantage of the 1035 exchange rules, will vary from person to person.  In general assets such as life insurance policies start small and grow over the years.  This build up of assets is often called the reserve.  The provider of the policy keeps the reserve in stocks, bonds and other areas where the funds can build up and earn a profit.  When the policies are left intact, these earnings are not taxable.  But the moment a holder tries to touch them, i.e. taking them out of the policy, such as a loan or withdrawal, the IRS will tax it.  Of course not all the money withdrawn is taxable, just the profit faces these regulations.  This is calculated by subtracting the base investment from the gross.  These are all part of the standardized 1035 exchange requirements, and also apply to a partial 1035 exchange, which only part of the money is withdrawn.

However, if an investor’s policy is not performing as well as they would like, perhaps it was purchased years ago and is no longer competitive with newer policies, they can have the option to rollover their plan to a new company without facing any taxation.  In other words, the IRS will treat the funds as if they haven’t been withdrawn, when they are transferred to the new policy, thereby avoiding unwanted taxes for the investor. However, the investor should understand that a few other taxes could apply with a 1035 exchange, so it’s important to check with the IRS before committing to any exchange.  By the way, you can check out a great type of insurance policy known as return of premium term life insurance to give yourself more life insurance options to choose from.

Related posts:

1. The 1031 Exchange Rules
2. Insurance Options For Your Future
3. Getting Solid Life Insurance Advice

The IRS 1031 exchange rules, if followed carefully, will mean that you do not pay the 20 – 30% in capital gains.  In other words, if you sell your property, the IRS will expect you to give them a percentage of your profits.  However, if you sell the property and turnaround to buy another, you will not need to pay the IRS.  As long as you follow the rules for the time period involved, you will technically the following 1031 tax exchange rules.

Some property owners lose their property due to it being condemned, a fire, or other damage.  If this is the case, there is a tax code called the 1033 exchange rules.  This rule helps you to avoid paying the IRS a large sum of money on a property that you are no longer making a profit from.  This is extremely helpful if you were expecting to follow rules for 1031 exchange.  This is also helpful if a government entity seizes a property.  For example, they seize property in exchange for money in order to build a public road.  This way, you may not follow your plan for the 1031 property exchange rules and save a significant amount of money, but you can’t still follow through with your plan to defer 20% – 30% of your property tax.

The rules of 1031 exchange must be followed very carefully in order to protect your tax status.  The sale of the property must be handled through an agent that is determined to be a qualified intermediary.  All of the money you make from the first sale must be applied toward the second sale.  If any cash is left over, it will be taxed.  In other words, the second property must be more expensive than the first property.  So you may want to take a look at the different types of mortgages available if you need some extra money for a more expensive property.  The main points that you must know in order to follow the 1031 exchanges rules is to understand the identification period and the exchange period.  As long as you follow the rules, you are on your way to saving a significant amount of money with the IRS.

Related posts:

1. The Similarity Between The 1031 And 1035 Exchange
2. Understanding The IRA Withdrawal Rules
3. Property Investment For The Next Decade