1031 Exchange – How does a property exchange work?

Everyone who has been looking to sell appreciated real estate that has been held for investment or business purposes has been provided with a simpler investment option now! The Internal Revenue Code (IRC) Section 1031 offers you an important tax-planning strategy to help preserve and grow your real estate investment portfolio. Through a transaction called a 1031 Exchange , you can defer the capital-gains taxes that arise from the appreciated investment or business property that is sold.

Cash flow is not expected to be produced out of these properties held for investment. They solely have to be maintained for investment to be qualified and treated for 1031 exchange. An asset or property can be also be acquired by you for trade or business and it will be deemed eligible for tax-deferred exchange treatment.


Eight steps of the Exchange 1031:

   Sell property.

   Give the capital gains to QI.

   Find like-kind Property within given period.

   Send a duty letter to the intermediary.

   Negotiate with the seller of like-kind property.

   Agree on a sales price.

   Your intermediary wires the capital gains to the title holder or Title Company.

   Fill out IRS Form 8824.

The duration within which a 1031 Exchange property can be held for is not a tax code mandate of one year, but the IRS preferably wants to see it being held for at least a year. The lone minute demanded period to be held is two years in section 1031 is a “related party” exchange.

There are multiple types of Exchange 1031 such as delayed exchange where the property is sold first and then buy a property wherein a 180-day period is to be completed. Delayed exchange is the most popular kind of exchange and it is followed by Reverse exchange (being the second most sought after form of exchange).

Now when it comes to reverse exchange, it works when the property is bought before replacing the property to be sold, which too should not exceed the maximum of 180 days.

Other exchange types include “improvement exchange” and “blended type exchange” and many more if we step into the details.

Few common errors to avoid with 1031 Exchange Property include:

   Do not draw any plans for a primary residence or a manor immediately prior to or after a 1031 Exchange.

   The house shouldn’t be moved right after a 1031 exchange, even temporarily.

   A contract must not be created to obtain the replacement property unpredicted upon the sale of a primary residence.

   Unfailingly advertise and list to rent a property at a saleable rental price.

   Make notations about the method used to establish the asking amount of the rent.

   Never begin creation for personal use right away after acquiring the property.

   Always assure that the replacement property is rent appropriately.

   Make notations about the details of all the potential tenants who visited the property with an

Intention to rent. They might be needed to be called upon as witnesses.

   If unforeseen circumstances led you to move into the house, it must be made sure that is documented and keep relevant proofs handy. Examples – Losing job (Relieving letter), Illness (hospital records), Marriage (Certificate of marriage), Elderly parent, so on and so forth.

Now as for selecting a qualified intermediary, one must keep in mind that it is someone who is linked to the taxpayer, either personally or financially cannot serve as the QI. This indicates that the taxpayer is only entitled to engage the services of their current accountant, attorney, broker, investment banker, broker or real estate agent. A 1031 exchange specialist should be insured and bonded against omissions and errors. An extensive educational background in finance, law or tax is imperative.

1031 Exchange is highly beneficial as the U.S. Internal Revenue Code, allowed parties to defer the payment of capital gains after the sales of a property that was invested in and also reinvest the earnings of the transaction within mentioned duration limits in a property or properties of like kind which could be valued equal than it or even more. Taxes can be deferred by the investors on the trading of the property until it is time IRS rules are accurately followed. Making this not just a brilliant approach for saving taxes and promoting speculation, in fact a brilliant estate planning tool. It is to be noted that an investor can defer capital gains on investment property endlessly until he is no more, possibly avoiding them altogether!

Engage our services for a profitable 1031 Exchange and defer Taxes

1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.

For consultation and assistance regarding 1031 exchange call – 888-993-2835 or email us at info@1031Xchange.com.

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