A Brief Guide To The 1031 Exchange
The IRS has a tax code referred to as the 10 31 exchange which gives investors and businesses the ability to reduce the amount of tax required to pay after selling the properties. It is also referred to as the Section 1031 exchange. It is important for you to comprehend how the 1031 exchange is applied. After selling a property, an investor or business person will get profits which can be used in the purchase of a property that is the same or similar to the one they just sold hence reducing tax. It is referred to as the exchange of like-kind property and this is the reason for it. One thing you need to know about that and that exchange is that it is carried out according to the rule of law. What happens is that after selling the property, the investor or business person needs to identify the replacement property within 45 days of getting the money received from the sale. After identifying the replacement property, the law proceeds to state that you will have a span of 180 days to close the deal of purchasing this property. There are 8 predefined steps you will need to go through when conducting a 1031 exchange. Despite the fact that this process is quite complicated and that you need the services of a professional to help you, it will do no harm for you to be familiar with the process is explained below.
The first step of this process is for you as the owner of the investment property to make the sale. The money that shall be received as capital gains from the sale of investment property shall be received by a qualified intermediary in the second step. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. The fourth step of this process will involve you sending a duty letter to the intermediary holding your capital gains, for the 1031 exchange. You will also need to hold negotiations with the party that is selling the property that was identified to be used in the exchange. After an agreement is reached on the amount of money to be paid, the middleman shall forward the capital gains to the title company. To complete the process, you need to fill out the IRS Form 8824.
Using the 1031 exchange is a good move because it enables you to save a lot of money that would have been otherwise spent on the payment of taxes. Another benefit of using 1031 exchange is at it enables you to save from paying up to 25% on the depreciation of your property in the transaction. Check out this link to read more.