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Advantages of a 1031 Exchange
If you want to save money in taxes, then the 1031 exchange can benefit you. In this article, you can know more about a 1031 exchange, its requirements, and its benefits.
If you are to use the 1031 exchange indicated in the Internal Revenue Code, you can exchange properties that meet the 1031 exchange rules. You will not need to pay capital taxes if you conform to the rules of the 1031 exchange.
1031 exchange is also known as like-kind exchange. The reasons for this is that you can swap one property for another without having to pay taxes if you are able to abide by its legal requirements.
Below are the requirements for the 1031 exchange.
1031 exchanges are without limit. But the rule states that you are only allowed 180 calendar days between the sale of one property and the purchase of a replacement property.
You are also given 45 calendar days to identify the replacement property after selling of your current property. When you have identified the replacement property, you need to write a letter to the Exchanger so that he can assess if the properties meet the requirements.
You can only exchange your business or investment property with another business or investment property. Qualified properties are called like-kind by the IRS. Any property of ‘like-kind’ can be exchanged if it is held for business or investment use.
Developed or underdeveloped properties are eligible for exchange. A ranch can be exchanged for an apartment. If you want to exchange your farmland for a mall, then this also qualifies for 1031 exchange. The rules are not very strict when it comes to the properties you will exchange. However, residential properties or held-for-sale properties are excluded.
You don’t have to buy an identical property. The only important thing is that the property is held for business use or investment. Whatever the size and type of property, it does not affect the exchange.
When making an exchange, you need to work with a qualified intermediary. The intermediary prepares the necessary documents and ensures that the exchange meets applicable laws.
Whatever amount you get from selling your property should be used to purchase the replacement property. The amount that you get from your sold property can be greater or less than the value of the property itself. If any amount is not invested in buying replacement property, then it will be taxable.
You don’t have to pay capital taxes with a 1031 exchange. Since you don’t pay for capital taxes, you will have more money for investment. With this tax incentive, you can buy a property that will give you greater returns.
You will have more money in the bank with a 1031 exchange, compared to selling, paying taxes and buying a new property with what money remains. If you are a commercial property investor, the money you save will greatly increase through improvement in your cash flow.