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What You Need to Know Before a 1031 Exchange

Tax laws are very broad, and section 1031 is one of the most widely discussed provisions of the tax laws. Many realtors, investors, and title companies mention this law as if it were very important. The honest truth is that 1031 is very crucial in promoting investments in the country. With this provision, a business person can swap a business investment or asset for another asset. The the benefit of this law is that you can swap the asset without having to pay immediate tax since capital gains are not recognized. To ensure that the exchange is not being misused, the law provides for some rules to follow in the exchange which is why you need the services of a tax professional when doing a 1031 exchange. Here are some few things you should know before a 1031 exchange.

The 1031 provision is used to swap investment assets and thus little or no application for personal use. Individuals cannot use the 1031 exchange to exchange their homes with other people. That said, if you are looking to 1031 your personal property, there is some property that qualifies. You should, therefore, consult with a tax expert to help you with the exchange. The general rule when making any exchange is that the assets must be of a like-kind. While 1031 exchange is only for like-kind, the term has a very broad definition which means that something like a building could be considered like-kind with raw land.

There is also a possibility of doing a delayed 1031 exchange. This is where one sells their asset and uses a middle man to hold the cash after the sale. The proceeds from the sale are used to purchase another property that the owner of the previous property is interested in. The the transaction is as good as a swap. Delayed exchanges also follow the specific guidelines of the section 1031. One important rule is that the owner of the asset cannot hold the cash received after the sale of the asset since doing so will spoil the 1031 treatment. You must then designate a property that you would like to acquire. One can designate more than one property provided that they are all within the confines of the law.
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It is also important to know that all 1031 exchanges must be done within six months. This means that you must only make the exchange when you have everything in order. If money is left after you acquire your replacement property in delayed exchange, such money is taxed as it is considered a gain. The 1031 exchange also considers the mortgages and loans that any property could be having. This means that if you exchange a property and your liabilities reduce, the reduction is considered a gain which is taxable.What Research About Resources Can Teach You