How To Save On Your Taxes Using The IRS Code 1031 Exchange. What exactly is the 1031 Exchange and how does it work? Well let’s first define 1031 Exchange.
1031 Exchange: “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of the like kind, which is to be held either for productive use in a trade or business or for investment”.
This rule was based on the 1031 section of the IRS code and the term 1031 Exchange is a term that is used within the real estate business. Now let’s take a look at how it works.
1. It will allow any taxpayer to defer the taxes on a property sale if it is exchanged one investment property for another similar type of property that is being used for business or investment purposes
2. You will need to hire a real estate lawyer to apply the legal processes that are required in the 1031 Exchange
3. If you would rather, you can hire a Qualified Intermediary or QI as a third party that is independent of the process. A QI will hold the profits from the sale of the first property that you sell until you are able to invest into another property or properties. You should have a minimum of two properties involved in this transaction
4. You are not allowed to use your own home to qualify for the 1031 Exchange. The 1031 Exchange only allows the exchange of one property for another of the like kind. When I say like kind, it does not mean the condition of the property or the value of the property but only that they are similar in their types like one investment property for another investment property
5. There are two very strict timeline guidelines: the Identification Period and the Exchange Period. These dates cannot be extended to meet your needs and the process has to be completed within the time that is allowed by the IRS to take benefits out of complimentary tax treatment
• Identification Period = 45 days from the actual date you sell your property and the time you view the new property that you want to buy
• Exchange Period = 180 days from the classification date up to the closing date. During this time you must get through the entire exchange process
Your best bet is to find a realtor who is very familiar with the 1031 Exchange tax code and dealing with investment properties. The 1031 Exchange can be very beneficial to you; however, you will have to make sure that you do everything accordingly. The only way you can make sure of this is if you have a realtor and a real estate lawyer to handle the proceedings for you.
About the Author: Millie Gil has been a successful Licensed Real Estate agent for over 25 years in Florida. Millie is Vice President of Bold Real Estate Group, a boutique agency committed to concierge personalized service for discerning buyers, sellers and renters of residential and commercial properties. For more information please forward your request to communityinfo@comcast.net
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