A tax deferred exchange is known as a real estate exchange or a 1031 exchange . It has similar principles with the barter system, a kind of transaction where goods or services are bartered for other goods and services. Using this, it is safe to say that a 1031 exchange does not require money (directly).
Even as money is not directly involved in a 1031 exchange, it is still deemed by a lot of financial specialists as a highly effective tool to wealth and investment portfolio building. By knowing the guidelines of 1031 exchanges can an investor successfully maximize it. Listed below are a few of the most essential things to remember.
Qualities of Qualified Property
The 1031 provision only involves properties that are being employed for business or held as investment. Real estates like warehouses or buildings may be swapped. Certain personal properties can also be exchanged but the guidelines could be tricky. If you find yourself about to swap your vacation home, it is recommended that you get advice from an attorney.
The exchange should come about between "like-kind" properties. This does not necessarily mean that you have to swap a four-storey building with another four-storey building. As the Federation of Exchange Accommodators has placed it, for properties to be "like-kind", both have to be located in the United States.
IRS is strict with the time limitations of 1031 transactions; investors that will take part in this exchange ought to be conscious of dates. Otherwise, the delinquent may be obligated to pay the taxes he was seeking to defer to begin with. The seller gets 45 days to find a like-kind property that he wishes in exchange for the property he plans to let go. The exchange between property owners must be carried out within 180 days or on the due date of the taxpayer's federal tax return, whichever is earlier.
Rules to Avoid Tax
As a rule, the proceeds of a 1031 exchange must be acquired first by a qualified intermediary. The proceeds ought to not grace your hands or your agent's as the swap would then be taxable. Likewise, all the money from the first sale of the seller's property ought to be reinvested on a new real property. Any type of cash that will be kept shall be taxed. To learn more on real estate exchanges, browse through 1031. org.
Grasping the Details of Real Estate Exchange Rules