Some Things to be Aware of the 1031 Exchanges
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 hear investors, realtors, attorneys and others say this but they are not very clear on what the process would include.
Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under such normal circumstances, the sale of such assets would actually incur tax liability on any capital gains. But, when you meet the requirements of section 1031 of such IRS tax code, then you will be able to defer any capital gains tax. But, it is really important to note that the 1031 exchange is not a tax avoidance scheme. If you are going to sell a business or such investment asset and you don’t exchange this with another property, then you will have to settle the capital gains taxes.
There are really many things that you may not understand with the 1031 exchange and such is the reason why it is wise to ask for help from the professional who is experience with such transactions. Before you try the 1031 exchange yourself, you must know a few things and get to understand the basics.
A Brief History of Exchanges
You must know that this 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.
What Research About Exchanges Can Teach You
There are also some 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.
You have to remember too that the exchanged property must be like-kind. This is one area that those new investors find confusing. The term like-kind won’t mean the same but such means that the exchanged property should be the same in scope as well as use. The IRS rules may be liberal but there are so many pitfalls for those who are not so 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. When you want to complete such exchange, then you will need the help of an intermediary who is qualified.