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Property Tax 101: 1031 Exchange Property Tax

Because most home owners and other businessmen are too busy doing the buying and selling of property, the benefits of getting a 1031 exchange that IRS offers is not being considered. The article will be tackling on the topic of the basics of the 1031 exchange property to assist with the showing of the benefits that you can get through the exchange.

The common practice of investors and traders when it comes to their profits from real estate is that they use them for other purposes or save the money for future purposes. Other sales are usually taxable by the IRS, that is why another option for the investors is to use their profit in obtaining another real estate but with the use of the 1031 exchange.

Another name for the 1031 exchange is the tax deferred exchange. Investors from the real estate business who have been working there for a long time usually know about this exchange and use it for their own strategy. The process works like this: you will buy a real estate that is qualified and with the profit you made, you need to buy or exchange it for another property within a given time period. The transaction is more of making an exchange that actually the buying and the selling of real estate.

There are some who are sceptical about the process because they think that it is unlawful or even illegal to practice such method. The actual truth is that the law knows about the existence of the exchange that is why it is not illegal in the last bit. Do not worry because the exchange is governed by many rules and regulations that will also protect you if you choose to use the method. Included in the regulations are policies about the violations that a person can get when practicing the exchange.

One important reminder in the 1031 exchange is that the properties you will be involving must be similar so as to be considered viable. The value of both properties need to be the same before you can proceed with the exchange. Two rules are usually employed by the 1031 exchange that you might want to look at first. They have stated that: The first rule is that both properties need to have the same or the one you sold must have a lower profit if the process you will do is an exchange. The other rule is that all the profit you will make from the first deal be entirely used for the replacement procedure.

The person who will be held accountable if ever the rules are not followed will be the one who proposed the exchange.

Earlier, there was the mention of having an amount of time when using the 1031 exchange. Identification Period and the Exchange Period are the specific names of these time limits.

The first period is the Identification period wherein the initiator must show the property they wish to make the exchange with. The time limit for this period is 45 days right after the property is sold, no holidays and weekends.

In the exchange period, you have 180 days after the transferring of the first property or until the tax return date of the taxable year given whichever will come first.