Things that You Need to Know About 1031 Exchange
With 1031 exchange, investors have the ability to swap business assets with another business asset. The assets that are being swapped in normal circumstances 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. Before you undertake these transactions, it is important to ensure that you seek advice from a professional that is experienced in these types of transactions.
There are things that you need to know before you try 1031 exchange by yourself. You need to know that 1031 exchange is not for personal use. It is advisable to use 1031 exchange for the properties that are held for business and investment purposes. Even if personal residences don’t qualify for personal residences, there are exceptions to the rule or personal use, you can have the ability to exchange personal property like personal piece of art.
The properties that qualify for 1031 exchange are the like-kind properties, these are properties that are used in the same way and are of the same scope. It is important to know that the 1031 exchange transactions do not take place at the same time. It is beneficial for the investor for the transactions not to take place at the same time because you can be able to sell your property and still have enough time to close on buying the like-kind property. These types of exchanges are commonly referred to as delayed exchanges and you will need help from an intermediary that is qualified. The purpose of the intermediary will be to hold the money that you get from selling your current property, he will also be responsible for buying the replacement property for you.
Even if you can be able to defer tax, IRS will always give you deadlines in doing so. Some of the rules that are set by the IRS include, the 45 day rules that you will be required to find a replacement property after you have sold your relinquished property. If you do not meet the 45 day requirement,you will not be granted the exchange benefits and you will be required to pay the taxes.
In order for you to complete your exchange successfully, the IRS will allow you to name multiple replacement properties. As long as you close on a one property within the set limit, you will be allowed to name multiple replacement properties by the IRS. IRS will require you to close on your replacement property within 180 days after selling your relinquished property if you want to have a successful exchange.