A Few Things that You Should Know Regarding the 1031 Exchange
There are those investors who are quite wise to their tax benefits from the 1031 exchanges for several years. Those are just new to this surely wonder and they wish to know more about this. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves.
The 1031 exchange would permit the investor to swap such business or the investment asset for another one. Under normal circumstance, the sale of the assets would incur tax liability on the capital gains. But, when you meet the requirements of section 1031 of such IRS tax code, then you will be able to defer any capital gains tax. It is imperative that you keep in mind that the 1031 exchange isn’t a form of a tax avoidance scheme. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due.
There are so many nuances to the 1031 exchange and this is the reason why it is really wise to seek some help from such professional experienced with the 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 must know that this is not 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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You must also be aware of the exceptions to the personal use prohibition. Just like most things in the IRS code, there are also exceptions to the rule. The personal residences don’t qualify, you can also successfully exchange the personal property like the interest in a piece of artwork or tenancy-in-common.
You have to remember too that the exchanged property must be like-kind. This is an area which would sometimes confuse those new investors. The term like-kind doesn’t actually mean exactly similar but this means that such exchanged properties should be the same in use and scope. IRS rules can be liberal but there are various pitfalls for those who aren’t very 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. When you want to complete such exchange, then you will need the help of an intermediary who is qualified.