The 1031 Exchange Of Property
When investing in real estate, the 1031 exchange technique is at times put in practice. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. There is a protocol in which the technique is carried out in the proper way.
After an investor sells a given property and intends not to incur the tax costs, they have to reinvest the proceeds of the sold property in another new property within forty-five days. The law also states that the closing escrow of the newly acquired property should be in less than six months. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. For an investor who wishes to defer tax payments all through their investments, it is possible as the procedure can be repeated for as long as they wish to following the necessary rules. The initial investment property sold in the 1031 technique is called the down leg property. Likewise the property being acquired in the technique is the up leg property.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. As a result of this, passive income on the investments is at all times assured to the investors. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
There are times in real estate where property is stolen or burnt and therefore lost. This calls for the investor to put in place a replacement property to the lost property. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. It comes at an immense cost to the investor as most times replacement properties are more costly than the initial down leg property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.
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