Some Things to be Aware of the 1031 Exchanges
Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. There are also people who are only new to the game and they actually wonder what all the fuss is about. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves.
To make it easy, the 1031 exchange would allow the investor to swap a business or such investment asset for a different one. Under normal circumstance, the sale of the assets would incur tax liability on the capital gains. But, when you are able to meet the requirements that you can find in the section 1031 of such IRS tax code, you can then defer the capital gains tax. It is imperative that you keep in mind that the 1031 exchange isn’t a form of a tax avoidance scheme. When you would sell the investment asset or the business and you won’t replace this with another property, then you will pay for 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.
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Keep in mind that such is not for personal use. Though it can be tempting to consider trading up the primary residence and also avoiding capital gains liability, the 1031 is just available for property held for business or the such investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just the same with a lot of things in the IRS code, the are exceptions to the rule as well. Know that personal residences don’t actually qualify, you may a successfully exchange such personal property like tenancy-in-common or that piece of artwork.
Keep in mind that the exchanged property has to be like-kind. This is actually an area that would sometimes confuse the new investors. The term like-kind doesn’t actually mean exactly similar but this means that such exchanged properties should be the same in use and scope. The IRS rules may be liberal but there are so many pitfalls for those who are not so careful.
You must also remember that the exchanges don’t actually happen concurrently. A very important advantage is that you may sell the present property and get about six months to close such acquisition of the like-kind replacement property. This is actually called a delayed exchange. When you want to complete such exchange, then you will need the help of an intermediary who is qualified.