The Benefits of a 1031 Exchange
If you want to save money in taxes, then the 1031 exchange can benefit you. This article will discuss more about a 1031 exchange, the requirements, and the benefits you can get from it.
If you are to use the 1031 exchange indicated in the Internal Revenue Code, you can exchange properties that meet the 1031 exchange rules. You will not need to pay capital taxes if you conform to the rules of the 1031 exchange.
1031 exchange is also known as like-kind exchange. This means that you can exchange the same kind of investment or business property that meets the legal requirements without having to pay taxes.
If you want to use the 1031 exchange law, then you have to satisfy the following requirements.
You can exchange as many investment properties as you want under the 1031 exchange provision. However, you only have 180 calendar days to purchase a replacement property after selling.
Another rules that you have to follow is that you have to identify the replacement property within 45 calendar days after selling your current business property. When you have identified the replacement and relinquished property in a letter addressed to the Exchanger, he will assess whether the property mentioned in the letter meets the requirements.
Properties eligible for exchange are business or investment properties. Qualified properties are called like-kind by the IRS. Any property of ‘like-kind’ can be exchanged if it is held for business or investment use.
Developed or underdeveloped properties are eligible for exchange. If you sell your apartment to buy a ranch, then this qualifies for a 1031 exchange. If you want to exchange your farmland for a mall, then this also qualifies for 1031 exchange. The rules are not very strict when it comes to the properties you will exchange. REsidentail properties or held-for-sale properties are not eligible
Like-kind does not necessarily mean identical. The only important thing is that the property is held for business use or investment. There is no requirement for size and type of property.
When making an exchange, you need to work with a qualified intermediary. The intermediary prepares the necessary documents and ensures that the exchange meets applicable laws.
Whatever amount you get from selling your property should be used to purchase the replacement property. You can get a greater or lesser amount from the sale compared to the value of the property that you sold. If any amount is not invested in buying replacement property, then it will be taxable.
You don’t have to pay capital taxes with a 1031 exchange. This can help give you more money for investment. Since you have more money, you can but a better investment property that will give you high returns.
The 1031 is better than selling, paying taxes and buying with the remaining amount since you will have more money in the bank with it. The wealth building process can be accelerated with cash flow improvement for commercial property investors.