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Rules to follow when doing a 1031 exchange

When one property is being sold, and the primary one helps acquire it, one can suspend paying capital gain taxes on their investment property. When trading in a high maintenance investment for a low one the investor can give priority to how they invest without paying liability tax. When the properties you are exchanging are of the same value also ensure that the primary property you want to trade has gained in vale from the time you purchased it.

It is possible for an investor to sell properties without gaining tax responsibilities, all you need to do is ensure that both the acquisition price and the loan amount are higher or the same on the replacement assets. Some of the exchanges used by real estate traders are reverse, delayed, improvement and simultaneous exchange. The delayed exchange takes place when the exchanger surrenders the original property before acquiring the replacement asset. The role of an exchanger is to ensure the property is well secured, marketed and when the property is being sold a proper sale agreement is drafted before a delayed exchange occurs. A third party intermediary is vital at the beginning of the trade so that they start the deal of the submitted property which should be in a trust that is necessary for holding the funds for up to one hundred and eighty days.

However, the simultaneous exchange occurs when the replacement asset and the relinquished asset are closed simultaneously. When you purchase a replacement asset through and exchange accommodation before identifying it, it is referred to as the reverse exchange. The cons of this method are that you have to have a hundred percent of the funds as banks will rarely give loans on it. The improvement exchange is also known as the construction exchange where it allows the investor to make changes on the replacement property by using the exchange justness.

In a nutshell, the 1031 exchange rules to follow are that both the relinquished and replacement properties must be of the same character and nature even when their quality and grade is different. An exchange can only take place when the property is for investment purposes and not personal property. The net value of the assets must be higher or equal in value for the exchange to occur. The owner of the two properties being exchanged must be the same. In order to gain maximum benefits of your exchange it is vital that you wisely choose the replacement property. Important to note that the original property and the replacement property must be within the United States as provided under section 1031.