1031exchangeguide

 

401(k) is just about as far as most people get when it comes to Internal Revenue Code.  There is a section of tax code named 401(k), the namesake of your retirement plan. 

 

Section 1031 is finding itself popping up more and more each and every day, into normal conversation.  From Real Estate Agents to Investors, from soccer moms to title companies, everyone is talking.  We even hear talk of making it into a verb.  Even though 1031 isn't restricted to real estate, most talks occur in that field.

 

What is 1031 some people might ask.  The process of exchanging one asset for another here is called 1031 exchange, like-kind or Starker.  Most swaps that take place have limited tax that is due at the time of the exchange, if not none.  You can easily change your investment by cashing out your capital gain.

 

Cashing out allow the investment to grow, tax deferred.  You must follow some rules when property is being exchanged in a 1031 case. 

 

1031 is not allowed to be used on personal taxes

 

1031 is intended for investment or business property, you may not use it on a personal residence.

 

As with any tax rule, some holes may be found

 

Not all personal property exchange will qualify, however TIC's (tenant in common) do.

 

Like-Kind is a very broad term

 

This phrase means something different than what you think.  The rules are pretty liberal, allowing for exchanges that don't seem logical.  For instance, an apartment building could be traded with a strip mall. For further information regarding 1031 exchange, you can go to http://financial-dictionary.thefreedictionary.com/1031+exchange.

 

Delayed Exchange

 

The traditional way of exchanging is one property for another property, between two people.  The only difficult part is finding another individual with the exact property. 

 

Delayed exchange allows a third person to hold the money from your sale to buy a replacement.

 

A Replacement Property must be designated

 

After the sale of the first property, the funds are send to an intermediary, and then you have 45 days to designate a replacement property to ensure the 1031 continues properly.

 

It is possible to designate more than one replacement

 

The IRS allows the designation of up to three properties after the sale as long as you choose one of them.

 

You must close your sales within a 6 month term

 

Delayed timing has a second rule, states you must close on your new property within 180 days of the old sale date.

 

Any cash received on the transaction is taxed

 

Any cash that is paid to you from the sale of the property, from the intermediary is known as the boot, and is subject to taxation. Using a calculator would make things easy in this case.

 

Other debt like mortgages

 

Forgetting about loans attached to previous properties and receiving a gain will be considered a boot and will be taxed.

 

Working with a professional is really a great idea when it comes to any possible questions involved with the 1031 process.