A Beginners Guide To Options

What You Ought to Know About 1031 Exchange

Buying or selling properties does not appear to be complicated. But when talking about tax, what seems easy no longer seems that way. Even so, having knowledge about taxes and its effects may come in handy. For instance, when you wish to let go of one property and decide to invest in another property, specific tax rules apply. If the transactions involve an exchange between two like-kind properties, you may qualify for a 1031 exchange.

The 1031 exchange covers issues regarding the exchange of one business or investment property for another. Through this procedure, you will be able to sell your income and/or business property and exchange it for a like-kind property. One example for this is replacing your shopping center with an apartment building or an industrial building. To qualify for this, only like-kind properties that are held for business or investment purposes can be exchanged. Thus, you cannot exchange your residential property for a business property. A known advantage for the 1031 exchange is a chance to limited or no tax due at the time of the transaction. But you should always keep in mind that this method only works when both properties involved are of the same type.

When aiming for a 1031 exchange, there are certain rules and requirements. One of the most important rule to remember is its 180-day timeline. From the time you sold your old property, you will only have 45 days to identify potential replacement properties. This includes weekends and holidays. You can identify up to three potential replacement properties as long as their total value does not exceed the 200% limit. After the 45 days for identification of replacement properties, you will have a remaining 135 days to close the sale for one of the properties you listed. There will be no extensions and you have to pass the title before the 180th day.

You are also not allowed to hold the earnings of the sale of your old property. A qualified intermediary will hold the proceeds of the sale in a separate account, at least until you have completed the purchase of the new property. He or she is also responsible for preparing the documents required by the Internal Revenue Service for the exchange. Your family members or business associates for the preceding two years will not be qualified as an intermediary.

Besides the aforementioned requirements, you should also know that the name listed in the titles of the old and the new property should be the same. Besides these requirements and information, you will have to know more about 1031 exchange. To gain better understanding about it, you should consult a CPA or an attorney who have experience in this field.

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