A 1031 exchange can be described as a legal way in which an investor can sell his or her investment properties and at the same time use the money gained to buy similar investment properties.The 1031 exchange is used to refrain the property owner from paying capital gain taxes attracted from the sale of a property.The 1031 exchange is however restricted to properties that are the same or alike.These may include exchange of businesses, residential and commercial properties, holiday homes and so on.
This also means that the law does not allow the sale of primary residences in exchange for others.The 1031 exchange is also required by law to involve a third party member called the Qualified Intermediary.The job of the qualified intermediary is to retain all the proceedings earned from the sale of the first property till the second property is bought using all the proceedings.The internal revenue authority however prohibits the investor’s lawyer or real estate agents to act as the third party or the qualified intermediary.
The 1031 exchange is facilitated by a set of rules and one important rule is that the income earned from the sale of a property must be used in acquiring another like-mind property.Another rule clearly states that property to be acquired must be equal or of a higher value than the one being sold.In the 1031 exchange, the equity of the new real estate property should also be equal or higher than the equity of the sold real estate property.
Another term and condition is that the debt from the sold property should either be equal or less than the debt of the newly bought property.Another requirement in the 1031 exchange is that the replacing property should be identified in a time line not exceeding forty five days. Another thing to consider is that the newly acquired property must be purchased within one hundred and eighty days after the sale of the old property. The 1031 exchange can fail to happen if the periods given are exceeded.
The 1031 exchange is also accepted when it comes to vacation homes.Privately owned residential homes are only allowed in the 1031 exchange if the owner rents it out and can only reside in it for fourteen days in a year.It is good to know that once the new property is bought, all the remaining money is taxable.
The 1031 exchange investing is on the rise with a number of companies expressing their interests in it. An example of a company involved in the 1031 investment properties is the 1031 Gateway who are located in Coeur d’Alene, Idaho.