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What You Need to Know Before a 1031 Exchange Tax laws are very broad, and section 1031 is one of the most widely discussed provisions of the tax laws. Many realtors, investors, and title companies mention this law as if it were very important. The honest truth is that 1031 is very crucial in promoting investments in the country. The provision allows people to swap business assets for other assets. With a 1031 exchange, capital gains are not recognized which means that the exchange is not taxed. Doing this allows your investment to grow, but you have to remember that there are special rules that apply. Below are some tips on important things to remember when making a 1031 exchange. The 1031 provision is meant for swapping investment property as opposed to personal property. As such, it is not possible to swap your home., That said, if you are looking to 1031 your personal property, there is some property that qualifies. A a tax expert will be I a better position to help understand the exchanges that are legally possible. The the general rule is that the assets being swapped must be of like-kind. The term like kind is enigmatic in the sense that a building and raw land could be considered like-kind as long as they meet the criteria set out in the law. The 1031 exchange allows for people to do a delayed exchange. In this type of exchange, a sale of the property is made, but another party holds the cash for the owner. The cash is then used to buy a replacement property that meets your needs. The the transaction is as good as a swap. When doing a delayed exchange, it is important to follow the rules set out in section 1031. One such guideline is that the owner of the asset should not hold any cash after the sale of the asset because doing so could spoil the 1031 treatment. You are also required to choose a property that you wish to acquire. One can designate more than one property provided that they are all within the confines of the law.
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A maximum of six months is allowed for a swap to take place under the 1031 exchange provisions. It is, therefore, advisable that you make a swap when you have everything in order. Also remember that in the case of a delayed exchange, any cash that remains after the replacement property is bought must be taxed. The 1031 exchange also considers the mortgages and loans that any property could be having. This means that if you exchange a property and your liabilities reduce, the reduction is considered a gain which is taxable.Overwhelmed by the Complexity of Money? This May Help