Why Go for a 1031 Exchange?
The 1031 exchange is basically something that can help you save thousands of dollars in taxes. In this article, you can know more about a 1031 exchange, its requirements, and its benefits.
If you are to use the 1031 exchange indicated in the Internal Revenue Code, you can exchange properties that meet the 1031 exchange rules. This will help you avoid capital taxes altogether if you conform to the needs of the 1031 exchange.
A like-kind exchange best expresses the 1031 exchange. If you exchange your investment property with another investment property, the like-kindness is satisfied and you are exempted from paying taxes.
Here are the requirements of the IRS to be able to avail of 1031 exchange tax benefits.
1031 exchanges are without limit. The 1031 rules give you only 180 calendar days to buy your replacement property after you have sold your current property.
Also, once you have sold your current investment property, you are given only 45 calendar days to identify the replacement property. When you have identified the replacement and relinquished property in a letter addressed to the Exchanger, he will assess whether the property mentioned in the letter meets the requirements.
Properties eligible for exchange are business or investment properties. The IRS uses the term ‘like-kind’ for qualified properties. Any property of ‘like-kind’ can be exchanged if it is held for business or investment use.
Developed or underdeveloped properties are eligible for exchange. You can exchange a ranch for an apartment. If you want to exchange your farmland for a mall, then this also qualifies for 1031 exchange. The properties you can exchange can be an investment property. However, residential properties or held-for-sale properties are excluded.
You don’t have to buy an identical property. The requirement is that both properties must be held for business use or investment. The size and type of property do not matter.
A qualified intermediary is one person you need to work with when making an exchange. With the help of an intermediary, all necessary documents are made ready and the exchange is assessed whether it meets the requirements or not.
Whatever amount you get from selling your property should be used to purchase the replacement property. The proceeds can be greater or less than the value of the sold property. Any part of the proceeds not invested in a replacement property is taxable.
You don’t have to pay capital taxes with a 1031 exchange. With this, you will have more money for investment. You can buy attractive real estate properties with higher return potential due to the tax incentive.
Compred to selling a property and paying taxes before buying a new property, a 1031 exchange gives you more money in the bank when you use this option. If you are a commercial property investor, the money you save will greatly increase through improvement in your cash flow.
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