Advantages of a 1031 Exchange
If you want to save money in taxes, then the 1031 exchange can benefit you. In this article, you can know more about a 1031 exchange, its requirements, and its benefits.
If you are to use the 1031 exchange indicated in the Internal Revenue Code, you can exchange properties that meet the 1031 exchange rules. This will help you avoid capital taxes altogether if you conform to the needs of the 1031 exchange.
A like-kind exchange best expresses the 1031 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.
Here are the requirements of the IRS to be able to avail of 1031 exchange tax benefits.
There is no limit as to how many 1031 exchanges that you carry out. However, you only have 180 calendar days to purchase a replacement property after selling.
You are also given 45 calendar days to identify the replacement property after selling of your current property. You need to write a letter to the exchanger to Exchanger identifying the relinquished and replacement property which he will assess whether the properties meet the requirements.
You can only exchange your business or investment property with another business or investment property. Properties used for the same purpose are like-kind properties. You can exchange a property only if it is a like-kind property used for business or investment.
You can exchange either developed or underdeveloped properties. If you sell your apartment to buy a ranch, then this qualifies for a 1031 exchange. A farmland can be exchanged for a mall. The properties you can exchange can be an investment property. You cannot exchange your investment property for residential or held-for-sale properties.
When it says like-kind, it does not have to be identical. The requirement is that both properties must be held for business use or investment. Whatever the size and type of property, it does not affect the exchange.
You need to work with a qualified intermediary when making the exchange. With the help of an intermediary, all necessary documents are made ready and the exchange is assessed whether it meets the requirements or not.
Whatever amount you get from selling your property should be used to purchase the replacement property. The amount that you get from your sold property can be greater or less than the value of the property itself. 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. With this, you will have 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. Cash flow improvement will then help hasten the wealth building process for commercial property investors.