A Few Things that You Should Know Regarding the 1031 Exchange There are those investors who are quite wise to their tax benefits from the 1031 exchanges for several years. Also, there are those who are only new to the game and they also wonder what this is about. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves. The 1031 exchange would permit the investor to swap such business or the investment asset for another one. Under a normal situation, the sale of such assets would have tax liability on capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. It is imperative that you keep in mind that the 1031 exchange isn’t a form of a tax avoidance scheme. When you would sell the investment asset or the business and you won’t replace this with another property, then you will pay for the capital gains taxes. There are so many nuances to the 1031 exchange and this is the reason why it is really wise to seek some help from such professional experienced with the transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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Keep in mind that such is not for personal use. Though you would get tempted to think of trading your residence and avoid dealing with the capital gains, such 1031 is jus available for the property that is held for the business or the investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just like most things in the IRS code, there are also exceptions to the rule. Personal residences will not qualify, you may also exchange the personal property such as a piece of artwork or the tenancy-in-common. Keep in mind that the exchanged property has to be like-kind. This is actually an area that would sometimes confuse the new investors. The term like-kind doesn’t actually mean exactly similar but this means that such exchanged properties should be the same in use and scope. IRS rules can be liberal but there are various pitfalls for those who aren’t very careful. Remember that such exchanges don’t take place simultaneously. One of the important benefits is that you may sell the present property and have up to 6 months to close the acquisition of the like-kind replacement property. This known as delayed exchange. If you like to complete this exchange, then you need the help of such qualified intermediary.
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