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What is a 1039 Exchange? Wait, You Mean 1031 Exchange
What is a 1039 exchange? It has over 880 searches per month across the internet, but what is it? There is no such thing as a "1039 exchange" in the Internal Revenue Code (IRC). The comprehensive set of tax laws created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress, and is sometimes also referred to as the Internal Revenue Title. The code is organized according to topic, and covers all relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes. Internal Revenue Code or within the real estate and tax industries. The most closely related concept is a 1031 exchange. When people search for 1039 exchange, they are looking to find information about 1031 exchanges.
A Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , named after Section 1031 of the Internal Revenue Code, is a tax-deferred real estate transaction that allows an investor to sell qualifying property and reinvest the proceeds into a new property without immediate tax consequences including capital gains, depreciation recapture, state, and net investment income taxes. The primary purpose of a 1031 exchange is to encourage the continued investment in real estate by providing a mechanism for deferring capital gains and other taxes associated with real estate transactions. To learn more about the specifics of a 1031 exchange, check out What is a 1031 Exchange?
Additional search terms mistaken for 1031 exchange
In addition to 1039 exchange, there are many other search terms that the general public mistakes for 1031 exchange, whether it's misinformation, a typographical error, or a combination of both. Some of the other most commonly searched terms that don't exist as far as an exchange within the Internal Revenue code include:
- 1030 exchange
- 1021 exchange
- 1301 exchange
- 1231 exchange
The following terms are also commonly misused when referring to a 1031 exchange:
- 1099 exchange
- 1040 exchange
While there are 1099 and 1040 tax forms that serve different purposes in the U.S. tax system, they are not exchanges. 1099 and 1040 tax forms are used by different entities for distinct tax reporting requirements, but they do not have a direct correlation with a 1031 exchange.
The number 1099 comes from the 1099 tax form which is used to report various types of income received by individuals other than regular salary or wages. These forms are crucial for tax reporting purposes, allowing the Internal Revenue Service (IRS) to track and assess tax on income that falls outside traditional employment. The 1099 tax forms are not directly associated with a 1031 exchange.
Just like the “1099 exchange,” a “1040 exchange” does not exist. The 1040 number likely comes from the 1040 tax form - the main form used by individuals in the United States to file their annual income tax returns with the IRS. The form is officially titled "U.S. Individual Income Tax Return" and serves as the primary document for reporting various types of income, deductions, credits, and calculating the amount of taxes owed or refunded. There is no intersection between the 1040 tax form and a 1031 exchange; the tax form related to a 1031 exchange is Form 8824.
Why are people searching for information around 1031 Exchanges?
Whether the correct term is searched or a mistaken variation of digits + exchange like the list of examples above, 1031 exchanges are a powerful tax deferral strategy that provide real estate investors with numerous benefits including the following:
- Leverage Cashflow
- Tax Deferral is accomplished by substituting, or carrying over, the basis of the taxpayer’s relinquished property to the replacement property, making any necessary adjustment for additional consideration paid. The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is deferred, and paid at the time the replacement property is ultimately sold. Deferral : Investors may be interested in deferring capital gains and other associated taxes on the sale of investment properties. A 1031 exchange allows them to reinvest the proceeds from the sale into a like-kind property, thereby delaying the payment of taxes.
- Portfolio Diversification
- Property Upgrade: Investors may want to exchange properties for properties of different types to diversify their real estate portfolio without incurring immediate tax consequences.
- Estate Planning
- Wealth Transfer: Individuals engaged in estate planning might use 1031 exchanges as part of their strategy to transfer wealth to heirs while minimizing tax liabilities.
- Financial Planning
- Tax Efficiency: Individuals looking to optimize their tax position and maximize returns by exchanging a mostly or fully depreciated property might consider 1031 exchanges.
- Retirement Planning
- Income Stream: Real estate investors approaching retirement may use 1031 exchanges to transition from high-maintenance properties to passive income generating investments such as Delaware Statutory Trusts (DSTs).
- Capitalize on Growth Markets
- Market Trends: Property owners in markets experiencing significant appreciation may explore a 1031 exchange to capitalize on the increased value of their assets without triggering immediate tax liabilities.
- Educational Purposes
- Real Estate Education: Attorneys, accountants, financial advisors, and real estate professionals can provide additional value to their clients with a solid knowledge of 1031 exchanges as a powerful tax deferral strategy.
1031 Exchange Equals Tax Deferral
To recap, thousands of property owners are searching for more information around tax deferral for investment real estate - 1031 exchange is the solution they are searching for. Yet, there remains a high volume of searches for 1039 exchange, 1030 exchange, 1021 exchange, and many other variations mentioned above. Regardless of if these searches are simply typos or just misinformation, they do not exist. 1031 exchange is the correct term to search for if you are looking to defer taxes on qualify real estate transactions.
As a Qualified Intermediary, Accruit specializes in facilitating all types of 1031 exchanges, we offer services to help property owners navigate what can be a complex process. Reach out to one of our 1031 exchange experts for any 1031 exchange questions or to learn more about Accruit's Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange Qualified Intermediary services.
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.
