Learning the Basics of 1031 Exchange
Buying or selling properties does not appear to be complicated. But when talks about taxes is involved, that is a whole new different story. Even so, having knowledge about taxes and its effects may come in handy. For example, when you decide to sell your property and purchase another, there are certain tax rules you need to be aware of. If the sale involves properties that are held for business use or investment purposes, you may qualify for a 1031 exchange.
The 1031 exchange refers to a section in the Internal Revenue Code that talks about transactions involving 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. In this case, you may exchange a shopping center for an apartment or an industrial building. For this type of exchange to work, only like-kind properties that are both held for investment purposes, should be involved. This will not include the sale of your residence in exchange for an investment property. A known advantage for the 1031 exchange is a chance to limited or no tax due at the time of the transaction. Remember, for the exchange to be tax free, the two properties must be of the same type but not necessarily of the same quality.
When you qualify for a 1031 exchange, you should take note of its 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. Also take note that the total value of the properties you identify should not exceed the 200% limit or the double value of your old property when you sold it. After the 45-day period, you will be given 135 days to purchase any of the potential replacement properties you identified. There will be no extensions and you have to pass the title before the 180th day.
You also cannot get hold of the money you earned for the old property you sold. A qualified third party shall hold it for you in a separate account until you have closed the sale of the new property. The intermediary shall also be responsible for the preparation of the documents required by the Internal Revenue Service for the exchange. You must know that your family members and colleagues shall not be allowed to take the role of intermediary in a 1031 exchange.
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.