Did you know that you could exchange or swap your property without having to worry about any capital gains tax? It sounds intriguing, doesn’t it? Perhaps you have heard about 1031 exchange and did not care to get more facts about it. This article is an eye-opener –it contains basic information about exchange 1031, what qualifies and what does not.
So what does 1031 exchange involve?
A 1031, which is commonly known as a ‘1031 exchange’, refers to a case where a person swaps their investment asset or business for another. This practice is also known as ‘Starker’ or ‘like-kind exchange’. Despite most swaps being taxable, 1031 allows limited tax or no tax at all. This implies that it is possible to make a successful swap without having to worry about the associated capital gain tax.
What should you know?
The idea of swapping your asset sounds interesting but there are basics aspects that govern 1031 exchanges. Here are some of the things that you need to know before you decide to carry out 1031.
It does not apply to personal uses
If you are considering doing a 1031 exchange for personal use, it is not going to succeed since it is limited to business and investment property. The implication is that it is not possible to exchange your primary home for another one.
Only like-kind property qualifies
For 1031 exchanges to be successful, the properties in question should be ‘like-kind’. The word ’like-kind’ is used to govern the type of swaps that people do. It implies that you should only swap an investment property for another investment property. As such, ‘like-kind’ does not touch on issues such as property use, location, or even the quality.
It is possible to do a ‘delayed’ exchange
Usually, for a 1031 to go through there must be two like-kind properties but finding the perfect match is not an easy process. However, this does not mean that you cannot go ahead with your swap in such a case. All you need to do is engage in a delayed 1031 exchange whereby an intermediary is used to hold the cash after you have sold a property and use it in acquiring the replacement property. Even though it is a three party exchange, it remains within the limits of 1031.
Any cash received after property replacement is taxable
Even where an intermediary is used, there are chances that you may have some left over cash following the acquisition of a certain replacement property. Such cash is paid within a period of 180 days, and it is taxable since it is considered a capital gain.
You have up to 180 days to close a 1031
Timing is of importance when it comes to 1031 exchanges. It is a requirement to close on a deal on the new property you acquire 6 months after selling the old one.
A 1031 exchange is an easy way to dispose of a given property in favor of another. Nevertheless, you need to be aware of the involved rules and regulations lest you get yourself in trouble. As such, it is advisable that you work with exchange 1031 professionals.
