Some Things to be Aware of the 1031 Exchanges
Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. There are also people who are only new to the game and they actually wonder what all the fuss 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.
To make it easy, the 1031 exchange would allow the investor to swap a business or such investment asset for a different one. Under a normal situation, the sale of such assets would have tax liability on 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 several nuances to the 1031 exchange and you have to get the assistance of the professional who has experienced in these transactions. You are also curious about the basics and here are things that you should know before you would try such 1031 exchange.
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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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There are some exceptions to such 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.
You must also keep in mind that such exchanged property should be “like-kind”. This is actually an area that would sometimes confuse the 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. 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. One of the important benefits is that you may sell the present property and have up to 6 months to close the acquisition of the like-kind replacement property. This known as delayed exchange. When you want to complete such exchange, then you will need the help of an intermediary who is qualified.