The 1031 Exchange And All There Is To Know About It
The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also referred to as the Section 1031 exchange. The application of the 1031 exchange is the first thing you need to understand before proceeding. What happens is that a business can sell a property then use the capital to invest in the purchase of a similar property. It is referred to as the exchange of like-kind property and this is the reason for it. There is a law that governs the implementation of the 1031 exchange. According to the law, after an investor receives money from the property they just sold they will need to identify the property they are going to buy within 45 days. After identifying the replacement property, you will have 180 days to purchase it according to the law. There are 8 predefined steps you will need to go through when conducting a 1031 exchange. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.
To begin this process, the investment property will be sold by the owner. 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. The next step is negotiations with the sale of the replacement property that you would like to use in the exchange. The seller shall be paid by the middleman using the capital gains after the negotiations yield a suitable price for both parties. The last step in this process is to fill out the IRS Form 8824 so as to complete the process.
The capital gains of selling a property are usually taxed in the long-term or short-term, but with the 1031 exchange you will be able to defer such payments hence saving a lot of money. 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. Find out more about this topic here.
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