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Important Knowledge to Help You Understand 1031 Exchanges

Tax laws are very broad, and section 1031 is one of the most widely discussed provisions of the tax laws. Many realtors, investors, and title companies mention this law as if it were very important. Well, the truth is that it is very important in promoting investments in the United States. The provision allows people to swap business assets for other assets. The the benefit of this law is that you can swap the asset without having to pay immediate tax since capital gains are not recognized. This process allows investments to grow, but certain rules always apply to ensure that the provision is not being misused. Before you think of making an exchange, here are a few rules of engagement that you should follow through.

While 1031 allows swapping of investment and business property, the law does not apply to personal use. As such, it is not possible to swap your home., That said, if you are looking to 1031 your personal property, there is some property that qualifies. A a tax expert will be I a better position to help understand the exchanges that are legally possible. One an important rule is that assets being exchanged must be of the like-kind. The term like kind is enigmatic in the sense that a building and raw land could be considered like-kind as long as they meet the criteria set out in the law.

There is also a possibility of doing a delayed 1031 exchange. In this exchange, an individual will sell their asset but use a middle man to hold the cash received for the sale. The money received after selling the initial property is used to buy another property. Such a transaction is treated as a swap. It is important to follow the guidelines of the 1031 exchange when making a delayed exchange. One such guideline is that the owner of the asset should not hold any cash after the sale of the asset because doing so could spoil the 1031 treatment. You must then designate a property that you would like to acquire. One can designate more than one property provided that they are all within the confines of the law.
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A maximum of six months is allowed for a swap to take place under the 1031 exchange provisions. This means that you must only make the exchange when you have everything in order. If money is left after you acquire your replacement property in delayed exchange, such money is taxed as it is considered a gain. The 1031 exchange also considers the mortgages and loans that any property could be having. So when you get property with lesser obligations, the reduction in obligations is treated as a gain which is taxable.How to Achieve Maximum Success with Resources