How You Can Benefit from the 1031 Exchanges
When you plan to sell your investment or the business property, you must know that the capital gains tax on the profits could run as much as fifteen to thirty percent when the federal and state taxes are combined. For this reason, it is a great solution that you take the needed steps to avoid such big loss. A big bite on the tax could wipe out money that you may use for investments in the future.
You should know that the 1031 exchanges may permit you to defer taxes. This is actually an excellent wealth-building tool which is provided to the taxpayers. This is a huge part of the success tactic of a lot of financial wizards and also the real estate gurus. The name is obtained from the Section 1031 of the IRC and the tax-deferred exchange allows the taxpayer to sell the income, investment or the business property and replace this with a like-kind property.
Capital gains on the property sold are deferred so long as you follow the rules of the IRS. This is a great tax and investment strategy and estate planning tool. The investor could continue deferring those capital gains on the investment property until death and this means potentially avoiding them all.
In the past, there were no time limits on exchanges. The IRS needed stricter controls on the process and such resulted to 1984 Section 1031. The legislation actually limited the deferred exchanges which defined the “like-kind” property and this made the timetable to be able to complete the exchanges.
The real estate property which has been held for investment or business can qualify for 1031 exchange. A personal residence and the fix-and-flip property doesn’t qualify for this since this is part of the category of property which is held for sale. The second homes or the vacation homes are not held as rentals and this means that they cannot qualify for the 1031 treatment but under the Paragraph 280 in the tax code that has the usage test which applies to such properties. You should consult a tax expert for this.
The property bought for resale and one that is under development don’t qualify for the tax-deferred treatment as well. Stocks, bonds, notes and inventory property and also the beneficial interest in partnership aren’t like-kind property for exchange purposes.
In order to qualify for 1031 property exchanges nowadays, the transaction should take the form of an exchange instead of just a sale of a single property with subsequent purchase of a different one. The property that has been sold and the new property for replacement should both be held for investment purposes or for the productive use in business or trade. An example is the shopping center which has been exchanged for land.