What are 1031 Exchange Properties?
When people are into real estate, their primary concern is only about buying and selling properties, and they are not mindful about the 1031 exchange that the IRS has offered to people. 1031 exchange has benefits to those who deal with real estate and these benefits will be discussed below.
When a real estate investor makes a profit from sales, the money they get is usually placed in a bank or used to purchase some other important things. What they don’t realize is that with the 1031 exchange, they can use the money to purchase another real estate property which is now non-taxable compared to other normal sales that are taxable with the IRS.
Tax deferred exchange is another name for the 1031 exchange. Many real estate investors who have knowledge of this tax deferred properties use this as a part of their strategy. This is how the exchange goes: when you sell a qualified property, the money you get should be used to purchase or exchange it for another property in a given time frame. This transaction is treated as a type of exchange and not the usual buying and selling.
There are people who look at this transaction differently and they think that this is against the law. Transactions like this are within the boundaries of the law. This is not illegal because it comes with rules and regulations when you make the exchange. There are tax liabilities for those who transact exchanges with violations.
There should be similar properties involved in the 1031 exchange to pass the regulation. There should be the same value for the property that was exchanged. The two major and simplified rules for 1031 are given below.
To summarize the two rules it simply states that you need to use all the money you received from the sale of a qualified property to purchase the replacement whose value should be the same or greater than that of the property sold.
The acquired or exchanged property is non taxable under 1031 exchange rules but if the person who acquires property violates any of the rulers, he will then be asked to pay taxes for his newly acquired property.
The partial tax-deferral is used for a partial exchange and the difference in price between the two properties will be taxed as a non like kind property.
The time frame for the acquisition of property from the sales of a qualified property should be followed. The timelines are also called identification period or exchange period.
The time when a person chooses from among the properties the one that he will take as an exchange, is the identification period. It will take 45 days including weekends and holidays, from the day he sold the property, for a person to find a property for the exchange.
The exchange period represents 180 days after the transfer for the first property, or the tax return due date for the taxable year or whichever is earlier.