Things You Should Know About 1031 Exchange.
1031 exchange is a tax code that regulates the exchange of property. Just because you have a property in real estate does not mean you go exchanging property anyhow without considering this law. Properties that are owned for production and investment purposes are the one that qualifies for the 1031 exchange properties of the same nature. Like-kind refers to the nature of investment rather than the form.
An investment property is usually exchanged for another investment property. If you have an office you can exchange it for an apartment or bare land with shopping Centre. Any combination will work. The one exchanging the properties has the right to adjust investment strategies to ensure all needs are met. Personal residence is never exchanged for an investment property in 1031 exchange or stock in trade.
Investors who may exchange properties quickly after getting it or have many such exchanges are considered to be in business and exchange 1031 does not tolerate that. The properties that are regularly exchanged are seen as stock in trade. Persons dealing with stock in trade are called dealers. They are not allowed to exchange their real estate unless they can prove that it was acquired and held strictly for investment.
It may not be as easy to define a dealer accurately. As much as you cannot define a dealer, there are pointers to what constitutes one. This include; how long the property is held and the principal business of the owner. Other factors to know a dealer property is the use of that possession and the reason why it was first acquired.
There are properties that are not supposed to be exchanged in the 1031 exchange. For one, a primary residence usually does not qualify for an exchange because it is not used in trade or business or investment. However, any portion of that primary residence that is used in a trade or business or for investment may qualify for a 1031 exchange. The tax code specifically excludes some property even if the property is used in trade or business or for investment. The excluded properties normally involve stocks, bonds, notes, securities and interests in partnerships.
As you embark on the exchange process ensure that you have a facilitation company with you. You need to do a good background check of the facilitator you are to choose. Agents should not be allowed to act as facilitators. If you need clarity on anything regarding the exchange, you should ask from the facilitator. For review, purposes ensure you have copies of documents that the facilitation company will use in the exchange.
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