1031 exchange is normally used by investors to swap one business asset for another. In normal circumstances, the properties that are swapped in 1031 exchange will incur tax liability on any capital gains. As an investor you, can be able to defer any capital gains tax if you have been able to meet the requirements of the section 1031 of the IRS tax code. Before you undertake these transactions, it is important to ensure that you seek advice from a professional that is experienced in these types of transactions.
There are things that you need to know before you try 1031 exchange by yourself. It is imperative to know that 1031 exchange cannot be used for personal purposes. It is advisable to use 1031 exchange for the properties that are held for business and investment purposes. Even if personal residences don’t qualify for personal residences, there are exceptions to the rule or personal use, you can have the ability to exchange personal property like personal piece of art.
In the 1031 exchange, there are properties that are exchanged, the properties exchanged need to be like-kind which means the properties that are similar in their scope and use. The 1031 exchanges do not take place simultaneously, this is something that you need to know. It is beneficial for the investor for the transactions not to take place at the same time because you can be able to sell your property and still have enough time to close on buying the like-kind property. You need ot have a qualified intermediary if you undertake these types of transactions, the transactions are also known as delayed transactions and in order for them to be successful, you will need the qualified intermediary. The intermediary will be required to hold the money that you have gotten from the property that you have sold and he will purchase the replacement property for you.
Even if you can be able to defer tax, IRS will always give you deadlines in doing so. IRS will set rules like the 45 day rule, in this rule, you are required to have found a replacement property after 45 days of selling your relinquished property. If you fail to do this, you will not be granted the exchange and you will be required to pay the taxes.
In order for you to complete your exchange successfully, the IRS will allow you to name multiple replacement properties. You are allowed to name the multiple properties as long as you are able to close on one in the set limit time. You will be required to close on your replacement property within 180 days after the sale of your relinquished property or your exchange will not be considered successful.