The Benefits of a 1031 Exchange
The best benefit of a 1031 exchange is the great savings you can get on taxes. If you continue reading this article you will know more about a 1031 exchange, its advantages and requirements.
If you are to use the 1031 exchange indicated in the Internal Revenue Code, you can exchange properties that meet the 1031 exchange rules. You will not need to pay capital taxes if you conform to the rules of the 1031 exchange.
Another term used for a 1031 exchange is a like-kind exchange. If you exchange your investment property with another investment property, the like-kindness is satisfied and you are exempted from paying taxes.
Here are the requirements of the IRS to be able to avail of 1031 exchange tax benefits.
1031 exchanges are without limit. But the rule states that you are only allowed 180 calendar days between the sale of one property and the purchase of a replacement property.
Another rules that you have to follow is that you have to identify the replacement property within 45 calendar days after selling your current business property. When you have identified the replacement and relinquished property in a letter addressed to the Exchanger, he will assess whether the property mentioned in the letter meets the requirements.
Only properties held for use or investment in business are eligible for exchange. Properties used for the same purpose are like-kind properties. Any property of ‘like-kind’ can be exchanged if it is held for business or investment use.
You can exchange either developed or underdeveloped properties. You can exchange a ranch for an apartment. If you want to exchange your farmland for a mall, then this also qualifies for 1031 exchange. The rules are not very strict when it comes to the properties you will exchange. REsidentail properties or held-for-sale properties are not eligible
When it says like-kind, it does not have to be identical. The only important thing is that the property is held for business use or investment. Whatever the size and type of property, it does not affect the exchange.
You need to work with a qualified intermediary when making the exchange. With the help of an intermediary, all necessary documents are made ready and the exchange is assessed whether it meets the requirements or not.
The replacement property should use up all the proceeds of the sale of your current property. The proceeds can be greater or less than the value of the sold property. If any amount is not invested in buying replacement property, then it will be taxable.
Taxes can be deferred with a 1031 exchange. This can help give you more money for investment. With this tax incentive, you can buy a property that will give you greater returns.
You will have more money in the bank with a 1031 exchange, compared to selling, paying taxes and buying a new property with what money remains. The wealth building process can be accelerated with cash flow improvement for commercial property investors.