What Are Exchange Properties?
For an investor who is interested in selling an investment property or business, yet is concerned about paying the high taxes, then exchange properties may be the way to go. With reference to the 1031 exchange code, investors are allowed to complete a tax deferred exchange whether they own the property outright or still have an outstanding balance owing.
The Internal Revenue Code section 1031 will allow you to defer taxes on capital gains if you exchange rather than sell your property, and it is available to both personal property owners and real estate owners. A 1031 property exchange may save you as much as 15 to 35% in state and federal taxes on each dollar of gain, depending upon your particular state’s tax rates. Of course there are certain guidelines and a few basic steps that need to be followed in order to take advantage of this type of tax deferred 1031 exchange. And, keep in mind that this tax deferred exchange is one of the few remaining tax benefits approved by the IRS.
There are two main decisive factors that identify the types of properties that qualify as exchange properties under the section 1031 exchange code. This is defined by the Internal Revenue Service as “like-kind” property, an important distinction because the IRS determined that the like kind aspect part of the exchange is the key to the validity of the whole transaction.
The two types of property that are considered allowable as exchangeable properties according to the Internal Revenue Service are properties that are held for a productive use of trade or business and/or property that is used for investment purposes. If the owner determines that their property will qualify as a 1031 like kind exchange, then there are two additional steps that need to be taken so that they can take full advantage of the tax deferment. One of these steps is to acquire the replacement property, keeping in mind that it must have a value that is at least as much as the property that they wish to exchange. The second step is that all of the equity from the exchange property must be transferred to the replacement property. If these two steps are completed, then the tax free transaction should take place with no problems.
As you may expect, there are other regulations and provisions that exist within the area of qualified tax deferments and they primarily deal with the problem of delayed exchanges. This normally occurs sometime between the time that a property is sold and the new exchange property is received. The Internal Revenue Service allows 180 days in which the whole exchange properties transaction must happen. This also includes guidelines for identifying a qualifying exchange property in order to be able to receive the tax deferment benefit, thus making it a good idea to retain a good qualified intermediary and an experienced tax advisor to help handle any exchanges of 1031 properties.
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