What You Must Know About the 1031 Exchanges
There are those investors who are quite wise to their tax benefits from the 1031 exchanges for several years. Those are just new to this surely wonder and they wish to know more about this. They would hear realtors, investors, attorneys and others mention such but they are certainly not very clear on what the process actually includes.
To make it easy, the 1031 exchange would allow the investor to swap a business or such investment asset for a different one. Under normal circumstance, the sale of the assets would incur tax liability on the capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. But, it is really important to note that the 1031 exchange is not a tax avoidance scheme. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due.
There are really many things that you may not understand with the 1031 exchange and such is the reason why it is wise to ask for help from the professional who is experience with such transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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You need to remember that this isn’t for personal use. Though it can be tempting to consider trading up the primary residence and also avoiding capital gains liability, the 1031 is just available for property held for business or the such investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just similar to most things in the IRS code, you should keep in mind that there are exceptions to the rule. Know that personal residences don’t actually qualify, you may a successfully exchange such personal property like tenancy-in-common or that piece of artwork.
Keep in mind that the exchanged property has to be like-kind. This is actually an area that would sometimes confuse the new investors. The term like-kind doesn’t actually mean exactly similar but this means that such exchanged properties should be the same in use and scope. The IRS rules may be liberal but there are several pitfalls for those who are not quite careful.
You should also keep in mind that the exchanges don’t happen at the same time. One of the important benefits is that you may sell the present property and have up to 6 months to close the acquisition of the like-kind replacement property. This is actually called a delayed exchange. If you like to complete this exchange, then you need the help of such qualified intermediary.