Many people who know about Internal Revenue Code Sections never go past the 401(k). However, look a little deeper and you will come across 1031 exchange. A few who can navigate the complexities of the tax codes know that 1031 exchange is a tax deferment loophole associated with real estate investments. However, the scope is broader.
To put it simply, a 1031 exchange swaps investment assets or businesses, for others. Within 1031, you get limited tax or no tax at all. In effect, you change your investment’s form without the IRS recognizing it as cashing out. Nevertheless, there are some things you should bear in mind; companies such as 1031 Exchange Place provide guidance when pursuing a 1031 exchange, so you are not caught on the wrong side of the tax laws.
A traditional exchange is a simple swap of property between two property owners. However, the chances of finding someone willing to swap whose property is what you are looking are slim. Therefore, you can delay the exchange. Also known as a Starker exchange, a delayed exchange includes a third party who keeps the money after you ‘sell’ and then pays when a replacement property is found.
Designate replacement property
In a Starker exchange, if you receive the money, you spoil your 1031 exchange. The third party receives the money from the sale of your property. Within 45 days of that time, you must designate a property that you want as a replacement, in writing.
You can designate many properties
According to the IRS, you can select many properties, but you must close on one of them in the end. You can also do the same if the properties are a fair market value compared to the property you sold. The properties must not exceed 200% of the total market value of all properties involved in the exchange.
There is no limit to the number of times you can use 1031. You can use it to change real estate investments avoiding taxes until you eventually sell them. However, be careful to use the services of a professional who observes all the rules applicable to property that depreciates.
The 1031 exchange rule is a good way to get around tax commitments, but make sure you have good advice and guidance before you start.