1031 Property Exchange
In the real estate investment sector, the 1031 exchange technique is often employed. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. There is a protocol in which the technique is carried out in the proper way.
The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. A maximum period of six months is issued as the probation period of closing escrow. The other property acquired should be of like kind as the initial property. The like kind characteristic means that the investment property should serve the function of business and investment only. It is possible to use this technique as many times as possible on an investment and in this way, the investor is always assured of not paying required taxes throughout their investments. The initial investment property sold in the 1031 technique is called the down leg property. The up leg property is that which is purchased in the 1031 exchange technique.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. This makes the investors under this scope to be sure of getting passive income from the investment. This is the income generated without having to struggle to create the means of its obtainment. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. Therefore the investor has to obtain a replacement property for the lost investment. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.
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