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The Important Requirements of a 1031 Exchange

Buying and/or selling a property seems easy. But when talking about tax, what seems easy no longer seems that way. Nevertheless, being familiar with taxes and its many aspects can be an advantage. For instance, when you wish to let go of one property and decide to invest in another property, specific tax rules apply. If the sale involves two investment properties, it may be suitable for a 1031 exchange.

The 1031 exchange covers issues regarding the exchange of one business or investment property for another. Through this procedure, you will be able to sell your income and/or business property and exchange it for a like-kind property. One example for this is replacing your shopping center with an apartment building or an industrial building. You should keep in mind that only like-kind properties that are held for investment or business purposes will qualify. Hence, exchanging your residence for an investment property, will not be qualified for this type of exchange. When you qualify to this type of exchange, you may have the chance to experience a tax deferral. But you should always keep in mind that this method only works when both properties involved are of the same type.

When aiming for a 1031 exchange, there are certain rules and requirements. For instance, you should be aware of the 180-day rule for this type of transactions. From the date of closing the sale of your old property, you will have 45 days to identify, in writing, a property of equal or greater value. This includes weekends and holidays. Also take note that the total value of the properties you identify should not exceed the 200% limit or the double value of your old property when you sold it. After the 45 days for identification of replacement properties, you will have a remaining 135 days to close the sale for one of the properties you listed. Before the 180th day, you will have to pass the title of the new property you bought in exchange of the old one.

During the exchange, you cannot get hold of the money. A qualified intermediary will hold the proceeds of the sale in a separate account, at least until you have completed the purchase of the new property. He or she is also responsible for preparing the documents required by the Internal Revenue Service for the exchange. Your family members or business associates for the preceding two years will not be qualified as an intermediary.

Other than the aforementioned requirements, it is also necessary to have the same taxpayer’s name listed in both titles of the old and the new property. Aside from this, there are other details involved in a 1031 exchange. It would help to know more about this type of transactions when you seek the assistance of a lawyer who has adequate knowledge and experience in this matter.

Source: http://www.masterandstudent.com/2016/03/benefits-of-1031-tax-exchange-for.html