Important Things to Know About 1031 Exchanges
Investors are able to swap one business asset with another using 1031 exchange. In normal circumstances, the properties that are swapped in 1031 exchange will incur tax liability on any capital gains. You can have the ability to defer any tax liability as an investor if you meet all the requirements of the section 1031 of the IRS tax code. Seeking the advice of a professional that is well experienced to deal with transactions that deal with 1031 exchanges is very important before you start to undertake these transactions.
Knowing a few things before you try 1031 exchange yourself is important. It is imperative to know that 1031 exchange cannot be used for personal purposes. 1031 exchange is normally advisable to use for the properties that have been held for business purposes or investment purposes. There are however exceptions to these rules, although personal residences don’t qualify, you can have the ability to exchange personal property like a personal piece of art.
In the 1031 exchange, there are properties that are exchanged, the properties exchanged need to be like-kind which means the properties that are similar in their scope and use. It is important to know that the 1031 exchange transactions do not take place at the same time. The fact that the 1031 transactions don’t take place at the same time, it is beneficial for the investor because he has enough time to buy the like-kind property after they have sold their current property. These exchanges are also known as delayed exchanges an in order to do them successfully you will need a qualified intermediary. The intermediary will be required to hold the money that you have gotten from the property that you have sold and he will purchase the replacement property for you.
Even if you can be able to defer tax, IRS will always give you deadlines in doing so. IRS will set rules like the 45 day rule, in this rule, you are required to have found a replacement property after 45 days of selling your relinquished property. If you fail to do this, you will not be granted the exchange and you will be required to pay the taxes.
Naming of multiple replacement properties is allowed by the IRS, this is beneficial for you since you will be able to have a successful exchange. You can name several properties as long as you close on one of them within the set deadline. You will be required to close on your replacement property within 180 days after the sale of your relinquished property or your exchange will not be considered successful.