Facts About 1031 Exchanges
1031 exchange can give you tax benefits as some investors have been receiving for years. There are some who are new to this and don’t know what this is all about.
With a 1031 exchange an investor is able to sell his investment business with the proceeds used to purchase another investment asset. If you sell an investment property you normally have to pay tax liability on your capital gains. Those investors who satisfy the requirements of section 1031 of the IRS tax code will not have to pay taxes on capital gains. The 1031 exchange scheme is not something that will help you to avoid taxes. Eventually, selling your business or investment asset and don’t exchange it with another like kind property, capital taxes will have to be paid.
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. Before trying a 1031 exchange you should know about the basics.
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.
Exceptions to this rule exist like others in the IRS code. Some personal property can qualify such as your interest in a piece of artwork except that personal residences cannot qualify for the exchange.
There is an area that confuses new investors and that is the rule that exchanged property must be like kind. 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. This is known as a delayed exchange. When you want to complete a 1031 exchange there is a need for a qualified intermediary to help you out. The person who will hold the sales proceeds is the intermediary and he is also the one who purchases the replacement property for you.
You are allowed by the IRS to name more than one replacement property to make it easier to complete a successful exchange. You should also follow their strict limitations when naming more than one replacement property. You can also name more than three if they adhere to a valuation requirement.
The value of the cash you receive during a 1031 exchange is called boot. You can get taxed for the boot, as a partial capital gain. You can still have a valid exchange even if you receive boot. In the tax year of your exchange boot will be taxable.