Some Things to be Aware of the 1031 Exchanges
There are those investors who are quite wise to their tax benefits from the 1031 exchanges for several years. There are also people who are only new to the game and they actually wonder what all the fuss is about. They would hear realtors, investors, attorneys and others mention such but they are certainly not very clear on what the process actually includes.
The 1031 exchange would permit the investor to swap such business or the investment asset for another one. Under such normal circumstances, the sale of such assets would actually incur tax liability on any capital gains. But, when you meet the requirements of section 1031 of such IRS tax code, then you will be able to defer any capital gains tax. However, it is quite important to take note that such 1031 exchange is actually not a tax avoidance scheme. When you would sell the investment asset or the business and you won’t replace this with another property, then you will pay for the capital gains taxes.
There are several nuances to the 1031 exchange and you have to get the assistance of the professional who has experienced in these transactions. You are also curious about the basics and here are things that you should know before you would try such 1031 exchange.
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You must know that this is not for personal use. Even if you are tempted to consider trading up your primary residence and avoiding the capital gains liability, the 1031 is only available for such property held for business or investment use.
Doing Exchanges The Right Way
There are some exceptions to such personal use prohibition. Just the same with a lot of things in the IRS code, the are exceptions to the rule as well. The personal residences don’t qualify, you can also successfully exchange the personal property like the interest in a piece of artwork or tenancy-in-common.
Keep in mind that the exchanged property has to be like-kind. This is one area that those new investors find confusing. Such term like-kind doesn’t mean exactly the same but this would mean that the exchanged property must be similar in scope and use. The IRS rules may be liberal but there are so many pitfalls for those who are not so careful.
You should also keep in mind that the exchanges don’t happen at the same time. A very important advantage is that you may sell the present property and get about six months to close such acquisition of the like-kind replacement property. This is actually called a delayed exchange. You must get the help of such qualified intermediary when you like to complete the exchange.