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.This is usually done so as to avoid paying the capital gain tax after selling an old property.The 1031 exchange is however restricted to properties that are the same or alike.The 1031 exchange properties can include businesses, holiday homes, residential and commercial real estates.
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.However any other party that represents the investor is restricted by the internal revenue authority to act as a qualified intermediary in the 1031 exchange.
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.The second rule indicates that for the 1031 exchange to work, the new property must be equally or greatly valued than the old one.The other rule is that the equity of the property sold must be less or equal to the equity of the new 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.The other law that must be followed is that the new exchange property must be identified within forty five days after the old property has been sold. The buying of the new real estate property should be done within a period of one hundred and eighty days after closing the deal on the old property. These timelines should be strictly followed because exceeding them can make the 1031 exchange to fail.
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.Another thing to note is that any extra money that will remain after a new property has been acquired is fully taxable.
There are many property management companies that deal in the 1031 exchange properties. An example of a company involved in the 1031 investment properties is the 1031 Gateway who are located in Coeur d’Alene, Idaho.