1031 Exchange – Simplified

Written by admin on October 19th, 2011

Property owners of buildings and other business establishments normally sell their assets to be able to buy or upgrade to a new one. They want to reinvest their money for the purpose of making their income grow. This can also be another form of helping struggling businesses to the road of recovery. This well known 1031 in the Internal Revenue Service has been a great alternative of investment in real estate industry. But how does this 1031 exchange exactly works?

A lot of owners have been naïve about such exchange code. This provides the chance for businessmen to postpone the payment of capital benefit tax and thus avail the benefits of depreciation. For an easier explanation, the owners enjoy the tax exemption on capital benefits when they sell any property. The only thing they have to consider is to buy similar property that has of the same market value.

Although it seems to be simple, it is somehow a complicated agreement.

The IRS assumes that this kind of transaction is not an immediate sale and purchase, but more of an exchange. It is basically exchanging a property for another. And the taxable income or capital benefit is deemed only in an outright sale negotiation, and not for an exchange type.

Take this as an example, if a property owner decides to purchase an investment lot for $ 150,000 and few years later plans to sell it for $ 200,000. Normally, the owner is responsible on paying the capital benefit taxes for the difference of $ 50,000. However, if he buys another property worth $ 200,000 or more, he can be saved from paying the capital benefit tax. This is because IRS considers the transaction as a single exchange of properties.

If you plan to buy property in any other place in the USA, you have to hire the services of interlocutor.

This is known to be the “certified mediator.” But you have to remember to be cautious on selecting the interlocutor. He or she must be experienced about such transaction, since he will be handling all the necessary procedural guidelines of IRS. There might be a tendency of not getting the capital tax exemption if your interlocutor does not know the entire proceedings.

Once the property has been sold, the proposal for buying the property must be submitted within 45 days and the purchase formalities must be accomplished within 180 days. You must firmly follow the deadlines, since there will be no other considerations whether it falls on a weekend or national holidays.

The primary thing to be considered on the 1031 exchange code is that the properties that will be bought and sold should be similar. If you are selling a personal property for personal use, you will have to buy a personal use property as well. That rule goes the same with commercial properties. If you are planning to sell your farm house, you are not only limited in buying a farm house, you can also choose other properties.

Before you decide to enter in this kind of set up, it is best to seek the help of a legal counsel. In this way you are guided on what should be done and what you need to avoid. Bear in mind that you are doing an investment, it involves a big amount of money, and thus you better polish everything to prevent any loopholes and complications in the future.

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