A 1031 exchange is a process where owners can exchange properties without paying any tax. The transaction implicates two similar properties in which one of them is sold and one is bought within a certain period. Before starting a replacement it is important to understand how it works. There are certain things you need to know about 1031 replacement properties and you can buy helpful information below.
How does it work?
The first thing you need to know is that only properties that are used for business purposes can be exchanged. Therefore, if you think about moving into another home, this strategy is not possible. There are a few principles that should be accomplished in order to sell a rental property without paying taxes and some of them are that the properties must be kept at minimum a year; they have to be used in business purposes and the replacement property has to be bought in 180 days.
The significance of “like-kind”
The term of “like-kind” does not refer to the quality or the grade of the property. Therefore, the properties have to share the same nature, but not the same quality. For example, a single-family rental can be exchanged for a shopping center or if you had a car business, you can exchange it with an apartment. As long as the properties are estimated at the same value, many combinations are possible.
How to make the exchange
An experienced intermediate has to supervise the deal when completing a1031 exchange. He keeps the funds after one property is sold and uses them to purchase the replacement one. The owner has to declare the property before selling it. After the property is sold, the investor has to find a new property that can be exchanged with the old one within 45 days.
How to avoid paying taxes
In order to avoid paying taxes, the owner has to use all the money from the sale of the old property to buy the new one. The cost of the new property has to be approximately the same as the price of the old one in order to avoid taxes. There are cases in which the investor pays taxes if he buys a cheaper replacement, or if he does not use all the money from the sale of the old one. It is also important to take into account the debts of the property in order to have the possibility to pay for them.
A reverse 1031 exchange can be possible
In some cases, it is possible that the investor can buy a new property before selling the old one, but it is more complicated, because he will not have the budget obtained by selling the old property. People who build companies that are not available on the market can use this strategy.
It is important to understand the mechanism of the 1031 strategy system before starting to make a replacement. Always count on professionals that can counsel you and take into consideration all the aspects that make a 1031 exchange possible.