Some Things to be Aware of the 1031 Exchanges
Some investors have been wise to such tax benefits of 1031 exchanges for a number of years. Also, there are those who are only new to the game and they also wonder what this is about. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves.
Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under a normal situation, the sale of such assets would have tax liability on capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. However, it is quite important to take note that such 1031 exchange is actually not a tax avoidance scheme. When you would sell the investment asset or the business and you won’t replace this with another property, then you will pay for the capital gains taxes.
There are really many things that you may not understand with the 1031 exchange and such is the reason why it is wise to ask for help from the professional who is experience with such transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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You need to remember that this isn’t for personal use. Though it can be tempting to consider trading up the primary residence and also avoiding capital gains liability, the 1031 is just available for property held for business or the such investment use.
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There are also some exceptions to the personal use prohibition. Just the same with a lot of things in the IRS code, the are exceptions to the rule as well. Personal residences will not qualify, you may also exchange the personal property such as a piece of artwork or the tenancy-in-common.
Keep in mind that the exchanged property has to be like-kind. This is an area which would sometimes confuse those new investors. The term like-kind won’t mean the same but such means that the exchanged property should be the same in scope as well as use. The IRS rules may be liberal but there are several pitfalls for those who are not quite careful.
You must also remember that the exchanges don’t actually happen concurrently. A very important advantage is that you may sell the present property and get about six months to close such acquisition of the like-kind replacement property. Such is termed as delayed exchange. If you like to complete this exchange, then you need the help of such qualified intermediary.