Thing to Know About 1031 Exchanges
Investors who have been in a 1031 exchange know of the tax benefits that this exchange can give them. Other are new to this game and may wonder what this is all about.
A 1031 exchange allows an investor to swp one business or investment asset for another. Normally, if you sell your property or investment asset, you have a tax liability on your capital gains. IF the requirements of section 1031` of the IRS tax code is met by an investor then he can defer paying capital gains tax. You should not look at a 1031 exchange as a way to avoid paying taxes. You will need to pay tax on capital gains when you sell your investment property but you don’t exchange it with the same kind of investment in return.
The 1031 exchange have many nuances and this is the reason why it is wise to seek out guidance from a professional experienced with such transactions. But if you want to know about the basics there are things you should know before trying a 1031 yourself.
If you think that you can trade your primary residence and avoid capital gains liability using 1031 exchange, your thinking is erroneous because a 1031 exchange only applies for property help for business or investment use.
Exceptions to this rule exist like others in the IRS code. Generally exchanging personal residences don’t qualify, but your may successfully exchange personal property such as a piece of artwork.
The requirement is that exchanged property must be like kind and some new investors are confused by this. When the term like kind is used it does not have to be exactly the same but it should be at least similar in use and scope. The IRS rules are liberal yet there are many pitfalls for the unwary.
One of the benefits of this exchange is that you can sell your current investment property and have up to six months to close on acquiring a like kind replacement property. What this is called is a delayed exchange. In a 1031 exchange it is important that there is a qualified intermediary to help you out. The role of the intermediary is to hold the proceeds from the sales and then purchase the replacement property with it for you.
In order for the exchange to be successful, the IRS allows you to name more than one replacement property. There are, however, strict limitations on these. Nominating more than three properties is possible if all adhere to a valuation requirement.
If you receive any cash during your 1031 exchange, the value is known as boot. Boot is immediately taxable to you as a partial capital gain. Receiving boot does not disqualify you from having a valid exchange. In the tax year of your exchange boot will be taxable.