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What No One Knows About Experts

Facts About 1031 Exchanges

There are some investors who know of the tax benefits that a 1031 exchange can give them and they have been wise about this for years. Other are new to this game and may wonder what this is all about.

A 1031 exchange allows an investor to swp one business or investment asset for another. A tax liability is slapped on your capital gains if you sell an investment property, and this is the normal process. Those investors who satisfy the requirements of section 1031 of the IRS tax code will not have to pay taxes on capital gains. However, do note that a 1031 exchange is not a tax-avoidance scheme. If you sell your investment property but don’t replace or exchange it with another property of the same kind, then you will still need to pay taxes on your capital gains.

The 1031 exchange have many nuances and this is the reason why it is wise to seek out guidance from a professional experienced with such transactions. But if you want to know about the basics there are things you should know before trying a 1031 yourself.

It can be tempting to think of trading your primary residence and avoiding capital gains liability, but the things with this is that a 1031 is only available for property held for business or investment use.

Since this is in the IRS code and like more things in that code, there are exceptions to the rule. In general, personal residences cannot qualify for the exchange, but there are some personal property that can qualify such as your interest in a piece of artwork.

The requirement is that exchanged property must be like kind and some new investors are confused by this. When the term like kind is used it does not have to be exactly the same but it should be at least similar in use and scope. Although these IRS rules are really liberal people still go into pitfalls over it.

One of the benefits of this exchange is that you can sell your current investment property and have up to six months to close on acquiring a like kind replacement property. The above benefit is called a delayed exchange. A qualified intermediary is needed when you want to complete such an exchange. The person who will hold the sales proceeds is the intermediary and he is also the one who purchases the replacement property for you.

A successful exchange becomes easier if you name more than one replacement property. There are, however, strict limitations on these. You can also name more than three if they adhere to a valuation requirement.

If you receive any cash during your 1031 exchange, the value is known as boot. As a partial capital gain, boot is immediately taxable to you. Receiving boot does not disqualify you from having a valid exchange. In the tax year of your exchange boot will be taxable.