Things You Need To Know About 1031 Exchange Properties
The 1031 exchange and its advantages have been unrecognized by most of the owners and investors nowadays since their only focus is towards the buying and selling of real estates. And so, this article will talk about the basic info about 1031 exchange properties and its benefits to people. Usually, the majority of the investors and traders of real estates just use their earnings for other purposes, some just set it aside for future use. Unlike normal sales which are taxable,031 exchange can actually help you when you use your earnings in buying another piece of real estate because, with its help, you sales will be non-taxable.
1031 exchange is also known as tax-deferred exchange. Some real estate investors are very knowledgeable about this because they actually use it as part of their business strategy. You have to sell a qualified property then in a specific time given to you, you need to use the earnings you made to buy or exchange it for another property – this is the simple understanding of it. Instead of being viewed as the usual buying and selling of properties, this transaction is viewed and treated as a simple exchange. You may think that it is kind of against the law or illegal. But do not worry since this act is perfectly legal and the law is very much well-informed about it. If you think that there are no rules and regulation involved in 1031 exchange, you are wrong. When these policies are violated, there will be an increase of tax liability for the person responsible for the exchange. The properties during the exchange must be of the same value.
But to simplify everything, here are the two major rules for 1031 exchange properties:
1. The property that will be the replacement must be greater or equal to the property that you sold’s total net sales price.
2. The replacement must be acquired using all the equity the seller received from his or her sale.
If these rules are violated, the person who started the exchange will be liable to pay the tax for the acquisition of the estate. Remember the involvement of time-frame in 1031 exchange properties? This time-frame can either be the Exchange Period and the Identification Period. Now, when we say Identification Period, this is the time when then the initiator must identify and point out the property he wants to take as an exchange. This time-frame starts from the day that the property was sold and runs for 45 days (weekends and holidays are already included). Meanwhile, the Exchange Period lasts for 180 days after the transfer of the first property (or after the tax return due date in some cases).