Financial Resource

If you are into the real estate business, particularly in renting a property, it is vital that you know what 1031 exchange means. There are some, who have not heard of this exchange.  The IRS created this in the year 1990. The purpose of this exchange is to help real estate investors. The benefit one gets from this is allowing one to re-invest their gains on comparable properties that they exchange for their old properties. It may appear like a basic tax deferral procedure, but it is equally important that you should know what the exchange rules are, especially if you are into the real estate business.

As with any other policies, there are some requirements in order to qualify and benefit from this 1031 Exchange Code.

In very transaction, there should be at least two properties involved. The property you are about to sell and the property that you will acquire to replace your old one. These properties need not be similar ones, just as long as you are using them actively in your trade or business. Bear in mind that your personal dwelling or your home, does not qualify for this exchange.

A real estate lawyer can help you make the contract of exchange.  You could also hire a “qualified intermediary” to help you. A “qualified intermediary” is a person referred to by the IRS as a person who enters into the exchange contract with you in order for you to acquire and transfer the property you give up and then to purchase the property you choose to replace your old one and transfer it to your name. The agreement should clearly state your rights to receive, borrow, pledge or acquire the monetary benefits or property held by the intermediary.

It is important to obey the letter of the law. Your contract should reflect clearly your intention to do a 1031 exchange. The closing date to acquire the new property must be within six months to one year after the sale or exchange of your other property. The IRS imposes a very strict rule on this exchange, so it is better to seek the aid of a tax attorney or any professional to help you. If you are an owner of a rental property that appreciates in value in a good market, you could re-invest it into a lesser but promising market. This way, you will gain a lot of money without having to pay big capital gains tax. To benefit much from his kind of exchange, you must be able to acquire the property or properties within 180 days from the sale of your previous property. Take into consideration that the 1031 exchange rules should be followed religiously to get the most benefit from your tax deferral at the end of the year.

These can help you a lot. If you have more assets, it also means a good investment for you in the future. By following all the rules in 1031, you will be able to get more benefit by purchasing a higher priced property in exchange of your lower-priced one, minus the extra burden of tax dues.

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