A 1031 exchange can be described as a legal way in which an investor can sell his or her investment properties and at the same time use the money gained to buy similar investment properties.The advantage of using the 1031 exchange is to ensure that the investor will not pay capital gain taxes incurred.The 1031 exchange only involves assets that are similar or alike.Vacation homes, businesses, commercial and residential real estate properties are some examples that qualify for the 1031 exchange.
The sale of individual residing homes in exchange for others is prohibited by law.The 1031 exchange is also required by law to involve a third party member called the Qualified Intermediary.The job of the qualified intermediary is to retain all the proceedings earned from the sale of the first property till the second property is bought using all the proceedings.The internal revenue authority bans lawyers and real estate agents related to the investor to act as the qualified intermediaries.
There are many guidelines used in the 1031 exchange and one major rule is that the money gained can only be invested in acquiring new properties similar to the old ones.Another rule clearly states that property to be acquired must be equal or of a higher value than the one being sold.In the 1031 exchange, the equity of the new real estate property should also be equal or higher than the equity of the sold real estate property.
Another term and condition is that the debt from the sold property should either be equal or less than the debt of the newly bought property.The other law that must be followed is that the new exchange property must be identified within forty five days after the old property has been sold. The buying of the new real estate property should be done within a period of one hundred and eighty days after closing the deal on the old property. These timelines should be strictly followed because exceeding them can make the 1031 exchange to fail.
Selling and buying of holiday or vacation homes is also allowed by the law in the 1031 exchange.Privately owned residential homes are only allowed in the 1031 exchange if the owner rents it out and can only reside in it for fourteen days in a year.In case there is any cash remaining after the investor has successfully purchased a new business or property, then it is required by law that the remainder should be taxed.
There are many property management companies that deal in the 1031 exchange properties. In Coeur d’Alene, Idaho, there is a company called 1031 Gatewaythat specialises in the 1031 exchange investments.