5 Uses For Resources

How You Can Benefit from the 1031 Exchanges

If you are planning to sell the investment or a business property, then you should know that the capital gains tax on profits which could run from 15 to 30 percent when the state and federal taxes are combined. Due to this reason, it is quite a great option that you take the steps needed for you to avoid such big loss. A big deduction for the tax could make you lose the money that you must use for the future investments.

You will be able to defer taxes through the 1031 exchanges. This has been considered as a great wealth-building tool that is offered to taxpayers. This has been a big part of the strategy of so many financial wizards as well as real estate gurus. The name comes from Section 1031 of the IRC and such tax-deferred exchange permits the taxpayers to sell the investment, business property or the income property and have this replaced with a like-kind property.

Capital gains on the property sold are deferred so long as you follow the rules of the IRS. This is a great tax and investment strategy and estate planning tool. What this means is that you can potentially avoid the taxes since you can continue to defer the capital gains on your investment property even until death.

Previously, there were no time limits on the exchange. The IRS demanded stricter controls of the process and this lead to the creation of 1984 Section 1031. The legislation restricted the deferred exchanges that defined the “like-kind” property and such created the timetable in order to complete the exchanges.

The real estate property which has been held for business use or for investment can qualify for the 1031 exchange. You should know that a personal residence doesn’t qualify and also the fix-and-flip property doesn’t qualify as well because this belongs to the category of property held for sale. The second homes or the vacation homes are not held as rentals and they don’t qualify for the 1031 treatment but there is that usage test under the Paragraph 280 in the tax code which may apply to such properties. You need to seek the advice of a tax expert for this matter.

The land that is under development and also the property purchased for resale don’t qualify for tax-deferred treatment. Bonds, stocks, notes and also the inventory property and the beneficial interest in the partnership are not “like-kind” property for the purposes of exchanges.

So that you can qualify for the 1031 property exchanges these days, the transaction need to take the form of an exchange rather than just the sale of a single property with subsequent purchase of another one. The property that has been sold and also a new property for replacement should be held for investment purposes or for a profitable use in trade or business. Such as a shopping center that is exchanged for land.

Source: http://bestfinance1.com/a-financial-guide-for-young-investors.html

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