Important Knowledge to Help You Understand 1031 Exchanges
Tax laws are very broad, and section 1031 is one of the most widely discussed provisions of the tax laws. This tax law is mentioned widely by realtors, investors and title companies like it is very important. The honest truth is that 1031 is very crucial in promoting investments in the country. This is because this law allows business people to swap a business asset or investment for another asset. The the benefit of this law is that you can swap the asset without having to pay immediate tax since capital gains are not recognized. To ensure that the exchange is not being misused, the law provides for some rules to follow in the exchange which is why you need the services of a tax professional when doing a 1031 exchange. Below are some tips on important things to remember when making a 1031 exchange.
The 1031 provision is meant for swapping investment property as opposed to personal property. This means that you cannot swap your home for another. Regardless, there are some loopholes that can be exploited to allow the exchange of personal property. You should, therefore, consult with a tax expert to help you with the exchange. The general rule when making any exchange is that the assets must be of a like-kind. The term like-kind is inexplicable because it incorporates a broad definition of a building and raw land could be considered like-kind although they are essentially not similar.
The 1031 exchange allows for people to do a delayed exchange. This is where one sells their asset and uses a middle man to hold the cash after the sale. The proceeds from the sale are used to purchase another property that the owner of the previous property is interested in. The the transaction is as good as a swap. It is important to follow the guidelines of the 1031 exchange when making a delayed exchange. One important rule is that the owner of the asset cannot hold the cash received after the sale of the asset since doing so will spoil the 1031 treatment. You must then designate a property that you would like to acquire. You can also designate as many properties as you wish as long as they meet the criteria set out under law.
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A maximum of six months is allowed for a swap to take place under the 1031 exchange provisions. It is, therefore, advisable that you make a swap when you have everything in order. If money is left after you acquire your replacement property in delayed exchange, such money is taxed as it is considered a gain. Also remember to account for mortgages and loans on the property. In the exchange of a property, if the property acquired has lesser obligations, the reduction in obligations is recognised as a gain which is subjected to some tax.Overwhelmed by the Complexity of Taxes? This May Help