Property Exchange Under 1031
The 1031 exchange is a technique used in the real estate investment sector. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. There is a protocol in which the technique is carried out in the proper way.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. A maximum period of six months is issued as the probation period of closing escrow. The other property acquired should be of like kind as the initial property. This means that their functions are of business and investment nature so as to be termed as like kind. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The down leg property is the property an investor disposes using the 1031 exchange. The up leg property is that which is purchased in the 1031 exchange technique.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. As a result of this, passive income on the investments is at all times assured to the investors. This is the income generated without having to struggle to create the means of its obtainment. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
There are times in real estate where property is stolen or burnt and therefore lost. This calls for the investor to put in place a replacement property to the lost property. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Sometimes the investor would wish to defer the taxes associated with the replacement property and therefore, they would need to do the 1031 replacement exchange where they would transfer the ownership of the lost down leg property to the acquired up leg property under the technique’s conditions.
As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.
Cited reference: Read Full Report