Some Things to be Aware of the 1031 Exchanges
Some investors have been wise to such tax benefits of 1031 exchanges for a number of years. Those are just new to this surely wonder and they wish to know more about this. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves.
The 1031 exchange would permit the investor to swap such business or the investment asset for another 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. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due.
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. You are also curious about the basics and here are things that you should know before you would try such 1031 exchange.
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You must know that this is not for personal use. Though you would get tempted to think of trading your residence and avoid dealing with the capital gains, such 1031 is jus available for the property that is held for the business or the 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. Personal residences will not qualify, you may also exchange the personal property such as a piece of artwork or the tenancy-in-common.
Keep in mind that the exchanged property has to be like-kind. This is one area that those new investors find confusing. The term like-kind won’t mean the same but such means that the exchanged property should be the same in scope as well as use. 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. One really important benefit is that you can sell the current property and have around six months to close the acquisition of such like-kind replacement property. This is actually called a delayed exchange. You must get the help of such qualified intermediary when you like to complete the exchange.