A Quick Overlook of Taxes – Your Cheatsheet

Things You Need To Know About 1031 Exchange Properties

The 1031 exchange and its advantages have been unrecognized by most of the owners and investors nowadays since their only focus is towards the buying and selling of real estates. And so, this article will talk about the basic info about 1031 exchange properties and its benefits to people. Usually, the majority of the investors and traders of real estates just use their earnings for other purposes, some just set it aside for future use. The 1031 exchange can actually help you when you use your earnings in buying another piece of real estate because with its help, you sales will be non-taxable, unlike the normal sales which are taxable.

1031 exchange is also known as tax-deferred exchange. Because they use it as part of their strategy in their business, real estate investors are knowledgeable when it comes to this area. The process simply goes like this: you have to sell a qualified property then in a specific time given to you, you need to use the earnings you made to buy or exchange it for another property. So the business transaction is actually treated as an exchange and not as the normal buying and selling. Other people may look at it negatively like it is something that is illegal or against the law. But do not worry since this act is perfectly legal and the law is very much well-informed about it. But do not think that rules and regulations do not exist in 1031 exchange because they do. There are policies that govern this exchange that any violations to them will increase the tax liability of the person responsible for the exchange. During the exchange, it is a rule that the two properties must be of the same value.

Here are the 1031 exchange properties’ two simplified rules:These are the two major rules concerning 1031 exchange properties:

1. The replacement exchanged property must have been equal greater compared to the total net sales price the property that you sold which then, in this case, is exchanged.

2. During your sale, all equity you will receive from it must be spent in acquiring the replacement.

The person who started the exchange will be liable to pay the tax for the acquisition of the estate if these rules are violated. Remember the involvement of time-frame in 1031 exchange properties? This time-frame can either be the Exchange Period and the Identification Period. Now, during this Identification Period, the initiator must identify and point out the property he wants to take as an exchange. This Identification Period runs for 45 days (weekends and holidays are already included) starting from the day that the property was sold. The Exchange Period, on the other hand, runs for 180 days after the successful transfer of the first property (or after the tax return due date in some cases).