1031 exchange rules that real estate investors should keep in mind
Internal Revenue Service (IRS) includes many rules that every investor who wants to make a 1031 exchange should know. This strategy is a powerful tool that made many businesses successful and flourishing. Before starting a 1031 exchange, you should know there are some steps you have to follow. Find out what an investor should do in order to have a successful business using the 1031 exchange strategy.
“Oh, I just love tax season”, said no one ever
You can avoid paying taxes by following some rules. The 1031 Exchange Experts say that it is possible to do this as long as you sell your property and use all the profit to buy a new property. In addition, the amount of money you gain with selling your property has to be approximately equal to the amount of money you spend on buying the new one. If the investor purchases a cheaper replacement or does not use all the profit to achieve the new property he will have to pay taxes.
The 45-day rule of identification
The investor must identify a replacement property within 45 days from closing the original property. There are no exceptions from this rule, the time frame is not negotiable and it includes holidays and weekends. It is not convenient to exceed this period because you will have to pay taxes.
Like-kind properties rules
It is necessary to know from the start that properties that are not used for business purposes cannot qualify for an exchange. Better said, homes that are not used for rental purposes cannot qualify. Another rule is that both properties have to have the same nature. These properties are called “like-kind”. For example, you can exchange an office with a shopping center, an apartment building with an industrial building, a shopping center with a land, and so on.
You must not have access to the money obtained from the sale of your property
This is a very important rule that you must respect. In order to avoid any problems, you should count on a professional intermediary that is specialized in this kind of business. Remember that you cannot have relatives or people with whom you made businesses as intermediaries. This person has to be a neutral participant in the 1031 exchange process.
What the qualified intermediary must do
It is essential to understand the duties of a qualified intermediary in order to choose a professional person who will help you. He will take the gain obtained from the sale of the property from the closing agent; hold it until the new property is bought and finally, deliver the money to the closing agent. It is important to choose a good team in order to make a profitable 1031 exchange.
There is a large number of rules that you have to respect if you want to exchange your property with another one in business purposes. As long as you follow these steps, a property exchange can be possible. Remember to inform yourself about every single detail before starting to swap your business.