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What You Need to Know Before a 1031 Exchange

Every U.S citizen is subject to many tax laws, and section 1031 is one of the most popular provisions among investors. Many realtors, investors, and title companies mention this law as if it were very important. Truth be told, the 1031 exchange is very important in promoting investments within the country. This is because this law allows business people to swap a business asset or investment for another asset. With a 1031 exchange, capital gains are not recognized which means that the exchange is not taxed. This process allows investments to grow, but certain rules always apply to ensure that the provision is not being misused. Here are some few things you should know before a 1031 exchange.

The 1031 provision is meant for swapping investment property as opposed to personal property. This means that you cannot swap your home for another. That said, it is possible to exchange personal property as long as certain conditions are met. A a tax expert will be I a better position to help understand the exchanges that are legally possible. The the general rule is that the assets being swapped must be of like-kind. The term like-kind is inexplicable because it incorporates a broad definition of a building and raw land could be considered like-kind although they are essentially not similar.

You can also do a delayed 1031 exchange. In this type of exchange, a sale of the property is made, but another party holds the cash for the owner. The proceeds from the sale are used to purchase another property that the owner of the previous property is interested in. Such a transaction is treated as a swap. When doing a delayed exchange, it is important to follow the rules set out in section 1031. One such guideline is that the owner of the asset should not hold any cash after the sale of the asset because doing so could spoil the 1031 treatment. You are also required to choose a property that you wish to acquire. You can also designate as many properties as you wish as long as they meet the criteria set out under law.
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A maximum of six months is allowed for a swap to take place under the 1031 exchange provisions. This means that you must only make the exchange when you have everything in order. In a delayed exchange, any cash that is left after the new property is bought is taxed since this is also considered to be a gain. Also remember to account for mortgages and loans on the property. This means that if you exchange a property and your liabilities reduce, the reduction is considered a gain which is taxable.Discovering The Truth About Money