Learning The Secrets About Exchanges

The Important Requirements of a 1031 Exchange

Buying and/or selling a property seems easy. But when talking about tax, what seems easy no longer seems that way. Nevertheless, being familiar with taxes and its many aspects can be an advantage. When you sell a property, for instance, and you wish to exchange it for another, it would help if you know what tax rules are associated with such exchange. If the sale involves two investment properties, it may be suitable for a 1031 exchange.

The 1031 exchange refers to a section in the Internal Revenue Code that talks about transactions involving the exchange of one business or investment property for another. Through this procedure, you will be able to sell your income and/or business property and exchange it for a like-kind property. In this case, you may exchange a shopping center for an apartment or an industrial building. To qualify for this, only like-kind properties that are held for business or investment purposes can be exchanged. Hence, exchanging your residence for an investment property, will not be qualified for this type of exchange. If you qualify for this type of exchange, you may be entitled to a limited or no tax due at the time of the exchange. But you should always keep in mind that this method only works when both properties involved are of the same type.

There are certain rules and requirements involved in a 1031 exchange. For one, you have to wary of a strict 180-day timeline. From the time you sold your old property, you will only have 45 days to identify potential replacement properties. You should take note that this will include all days with no exemption of weekends and holidays. Also take note that the total value of the properties you identify should not exceed the 200% limit or the double value of your old property when you sold it. After the 45-day period, you will be given 135 days to purchase any of the potential replacement properties you identified. Aside from these 180 days, you will not be given additional days to complete the exchange.

During the exchange, you cannot get hold of the money. A qualified third party shall hold it for you in a separate account until you have closed the sale of the new property. Your third party will also be tasked to prepare the documents required by the Internal Revenue Service at the time of selling the old property and buying the new one. Your family members or business associates for the preceding two years will not be qualified as an intermediary.

Besides the aforementioned requirements, you should also know that the name listed in the titles of the old and the new property should be the same. Aside from this, there are other details involved in a 1031 exchange. To better understand the details of this transaction, it is highly recommended to consult a CPA or an attorney who is knowledgeable in this field.

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