A 1031 exchange is the process whereby a business property seller is allowed by law to use all the profits earned from selling the old property to buy a new property.The advantage of using the 1031 exchange is to ensure that the investor will not pay capital gain taxes incurred.The 1031 exchange is however restricted to properties that are the same or alike.Vacation homes, businesses, commercial and residential real estate properties are some examples that qualify for the 1031 exchange.
This also means that the law does not allow the sale of primary residences in exchange for others.For the 1031 exchange to work, an independent third party member called the qualified intermediary must be involved.The role of the qualified intermediary is hold the profits that are earned from the sale of the first real estate property until they are reinvested in the second property.The internal revenue authority bans lawyers and real estate agents related to the investor to act as the qualified intermediaries.
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.In the 1031 exchange, the equity of the new real estate property should also be equal or higher than the equity of the sold real estate 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 new property should also be bought within a time line not exceeding more than one hundred and eighty days after the selling of the other property. These timelines should be strictly followed because exceeding them can make the 1031 exchange to fail.
Selling and buying of holiday or vacation homes is also allowed by the law in the 1031 exchange.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.In case there is any cash remaining after the investor has successfully purchased a new business or property, then it is required by law that the remainder should be taxed.
The 1031 exchange investing is on the rise with a number of companies expressing their interests in it. The 1031 Gateway is an excellent example of a property managing company that is located in Coeur d’Alene, Idaho and also deals in the 1031 exchange properties.