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1031 Exchange Basics Are Not So Basic
It is becoming tougher for people to keep their money these days. However, some people do not keep as much as they could simply because of their own ignorance. Some people are not aware, understandably, of the tax laws that could help them to protect their re-investment from unnecessary taxes.
One of the biggest areas of trouble is in real estate, or real property. There are laws that allow people to shelter their money from being taxed if their intent is to reinvest the money gained from one sale of property into another like kind property. This exchange of property is called a 1031 exchange. While it can be very helpful, it must be done right in order to qualify and keep your money sheltered.
A 1031 tax exchange is the reinvestment of the money gained from the sale of one property to another like property for the same intention. For example, if you wanted to get out of one rental property into another, you could do that and avoid taxes because you really have not gained anything yet.
There are also some other requirement s that the transaction from one property to the other be completed in a certain time frame. For example, the replacement property must be identified within 45 days of the sale of the relinquished property. Also, the sale must be completed within 180 days.
A 1031 exchange is not something that you can do by yourself. In order to qualify, you must use a qualified 1031 company to hold the money in the interim. The main reason for this is to make sure that the money is handles according to the laws. However, it is good to have a 3rd party as a witness anyways to make sure that all is okay with the IRS in how it is done.
While the idea is not to have a gain it can happen at times. This can happen for several reasons. One of the reasons that this can happen is when you downgrade in your property. When a gain occurs it is called a boot. The problem with receiving a boot is that you then need to pay taxes on that. Be sure you know where you stand and any possible things that you can do to prevent that from happening if you wish to defer all of the taxes from the sale of the property.
To better understand what a boot it is, it is helpful to understand how this can come about, even without the intention of making this happen. For example, if the property that you invest is less than the property that you sold. Without anything to offset that, it becomes a gain, or a boot. It can also happen in the same case, but instead of cash, the debt is reduced
One of the more difficult pieces of a 1031 exchange is finding the replacement property within the first 45 days following the sale of the other property. The IRS is strict on this one and will not file extensions on this, so it is a good idea to have a head start on that one before beginning the process.
About the Author If you have never learned about a 1031 exchange or 1031 exchange property, but you purchase and sell property, then you should learn a little more so that you can save a lot of money on unnecessary taxes.
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