Eclectic Homes

How do I Use a 1031 Exchange?

For sellers, land trades can become tax filings. If a profit is realized on the purchase, capital gains taxes at the rate of 15 percent employ to the profit over an exempt volume. This may lead to a sizable obligation. By the federal tax code, Title 26, Section 1031, investment or business property can be traded and capital gains tax deferred. A 1031 exchange may help sellers avoid a hefty tax bill and use the money they save for their own small business.

Background

The fundamental idea of a 1031 exchange is to defer capital gains taxes on the sale of income-generating small business property. You don’t pay tax immediately on any profit you understand on the exchange. Your profit selling the property is wholly reinvested in the new property.

Fundamental Rules

The two properties must be of a”like kind,” from the phrasing of the IRS, and have to be used in a trade or business, or as an investment. Housing doesn’t qualify for a 1031 exchange. The exchange can be simultaneous or delayed. The profit from the exchange may be utilized to make improvements to the replacement land. A 1031 exchange can also be done on personal property of like kind, but land stored for the purpose of resale doesn’t qualify.

Acquisition

In a 1031 exchange, the total paid for your new property must be equal to or greater than the land that is offered from the exchange. If the new property is purchased for under the property you sell, then the IRS will levy taxes on the gap.

Equity

In addition, the equity in the property that is sold must be used in buying the new property. If you own a property worth $100,000, but which has a mortgage lien attached in the amount of $75,000, this whole equity balance of $25,000 must be used in the new purchase. Any equity that is taken from the transaction rather than utilized in the order will be taxed.

Intermediary

The money earned from the purchase must be dealt with by a qualified intermediary, or QI, and it must be utilized in the following purchase. An exchange accounts is set up by the QI, who manages the acquisition and exchange according to the IRS rules. If you manage the transaction through your accounts or through a personal agent or agent, then the profits of the sale are taxable. The IRS will also tax any money profits.

Debts

The exchange cannot be carried out so as to escape debt duties on the property you sell. The property purchased must not own a debt obligation that is equally as good as that of the sold land. Otherwise, the IRS will tax the gap. A lower debt level on the purchased property must be offset by an additional cash investment.

Identification

The property to be purchased must be identified within 45 days from the date that the former property is sold. The new property must be obtained into the purchaser’s possession within 180 days of the date that the former property is moved to the new owner, or the due date for this year’s tax return, whichever date is sooner.

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