Important Details About 1031 Exchanges You Need to Know
There are many tax laws that apply to different areas and section 1031 is one of the most popular provisions. This tax law is mentioned widely by realtors, investors and title companies like it is very important. The honest truth is that 1031 is very crucial in promoting investments in the country. The provision allows people to swap business assets for other assets. With a 1031 exchange, capital gains are not recognized which means that the exchange is not taxed. 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. Before you think of making an exchange, here are a few rules of engagement that you should follow through.
The 1031 provision is used to swap investment assets and thus little or no application for personal use. This means that you cannot swap your home for another. Regardless, there are some loopholes that can be exploited to allow the exchange of personal property. With the services of a tax expert, you will be able to make a quick legal swap. One an important rule is that assets being exchanged must be of the like-kind. The term like kind is enigmatic in the sense that a building and raw land could be considered like-kind as long as they meet the criteria set out in the law.
The 1031 exchange allows for people to do a delayed 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. Such a transaction is treated as a swap. Delayed exchanges also follow the specific guidelines of the section 1031. This means that under no circumstances should you hold the cash received after the sale of your asset lest you spoil the 1031 treatment. You must then designate a property that you would like to acquire. The law also allows you to designate an unlimited number of properties subject to certain conditions.
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It is also important to know that all 1031 exchanges must be done within six months. It is, therefore, advisable that you make a swap 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. Last but not least, considerations must be made for mortgages and other debts attached to the property. This means that if you exchange a property and your liabilities reduce, the reduction is considered a gain which is taxable.What Almost No One Knows About Funds