A 1031 exchange is the process whereby a business property seller is allowed by law to use all the profits earned from selling the old property to buy a new property.This is usually done so as to avoid paying the capital gain tax after selling an old property.The 1031 exchange only involves assets that are similar or alike.These may include exchange of businesses, residential and commercial properties, holiday homes and so on.
This also means that the law does not allow the sale of primary residences in exchange for others.The 1031 exchange is also required by law to involve a third party member called the Qualified Intermediary.The qualified intermediary is responsible for holding all the sales earned on behalf of the investor until they can be reinvested in acquiring new property.The internal revenue authority however prohibits the investor’s lawyer or real estate agents to act as the third party or the qualified intermediary.
The 1031 exchange is facilitated by a set of rules and one important rule is that the income earned from the sale of a property must be used in acquiring another like-mind property.The second rule indicates that for the 1031 exchange to work, the new property must be equally or greatly valued than the old one.The other rule is that the equity of the property sold must be less or equal to the equity of the new property.
The debt of the old property must also be less or equal to the debt of the new property acquired.For the 1031 exchange to happen, the property to be bought using the money earned has to be identified within a period of forty five days after the first property sale. The new property should also be bought within a time line not exceeding more than one hundred and eighty days after the selling of the other property. These timelines should be strictly followed because exceeding them can make the 1031 exchange to fail.
The 1031 exchange is also legal when a holiday home owner wishes to sell the current one to buy another holiday home.The law requires that when exchanging for residential homes, the owner should rent it out and can only occupy it for a period not exceeding fourteen days annually.Another thing to note is that any extra money that will remain after a new property has been acquired is fully taxable.
There are numerous investment companies that are involved in the 1031 investment properties. The 1031 Gateway is an excellent example of a property managing company that is located in Coeur d’Alene, Idaho and also deals in the 1031 exchange properties.