The Skinny On 1031 Exchange Maximizing Profits By Minimizing Your Tax Liability

The Skinny on​ 1031 Exchange: Maximizing Profits by Minimizing your Tax Liability
A 1031 exchange refers to​ Section 1.1031 of​ the​ Internal Revenue Code which was passed in​ 1990 .​
Normally,​ when you​ sell all real and personal property,​ the​ tax code requires the​ payment of​ the​ Capital Gains Tax .​
That is​ to​ say,​ when you​ sell your office for $100,​000 more than you​ bought it​ for,​ you​ must pay the​ gains upon those earnings .​
However,​ after the​ passing of​ a​ 1031 Exchange that is​ no longer necessarily the​ case.
What types of​ Property Qualify?
A 1031 Exchange allows sellers of​ some real and personal property the​ opportunity to​ avoid paying capital gains taxes (which are 15% plus state taxes) by exchanging their sold property for newly purchased property .​
However,​ certain restrictions apply .​
the​ most important restriction is​ that only business property and investment property applies .​
So,​ an​ exchange under a​ purely residential home does not qualify,​ whereas exchanging a​ property that your business has used for its office,​ or​ even one used simply for investment diversification does .​


But simply selling your office isn’t enough to​ qualify you​ for a​ 1031 exchange .​
Rather,​ the​ code also requires that that you​ simultaneously buy a​ property of​ like-kind .​
This does not mean that if​ you​ are selling a​ 2000 sq .​
ft .​
office you​ must buy a​ 2000 sq .​
ft office .​
Rather,​ the​ term is​ interpreted very loosely to​ mean virtually any real estate held for productive use in​ a​ business or​ for investment,​ whether improved or​ unimproved can be exchanged for any other property to​ be used for productive business or​ investment purposes .​
So,​ if​ you​ sell and unimproved lot of​ land and purchase an​ improved one or​ visa versa,​ this still qualifies,​ just as​ selling industrial property and buying rental resort property does .​
the​ point here is​ that while like-kind is​ an​ important restriction,​ it​ has been interpreted so broadly as​ to​ give individuals a​ lot of​ free reign.
The Exchange
When most owners envision a​ 1031 exchange they envision a​ provision whereby they must buy and sell the​ two properties on​ the​ same week or​ even the​ same day .​
But that is​ not the​ case .​
a​ tax-deferred 1031 exchange allows up to​ 180 calendar days between the​ sale of​ the​ first property and the​ purchase of​ the​ second .​
But no matter the​ time between sale and purchase,​ a​ 1031 exchange is​ required by the​ Internal Revenue code to​ have a​ qualified intermediary to​ manage the​ exchange .​

A Qualified Intermediary
The requirement of​ a​ qualified intermediary is​ intended primarily to​ prevent individuals engaged in​ the​ exchange from using the​ time in​ between the​ sale and purchase of​ property to​ their financial gain .​
Although the​ seller has up to​ 45 days to​ set up the​ intermediary,​ the​ exchange is​ designed so that the​ seller should not profit from the​ use of​ the​ money before the​ purchase of​ the​ new property is​ made .​
An intermediary serves the​ judicial purpose of​ ensuring this .​
But it​ is​ important to​ remember that the​ qualified intermediary charges fee for this .​
While these services can vary in​ cost depending on​ the​ additional advisory services provided by the​ Intermediary,​ individuals interested in​ a​ 1031 exchange should expect to​ pay somewhere in​ the​ vicinity of​ $500 to​ $700 for the​ first exchange and $200 to​ $400 for each additional property.
The Skinny On 1031 Exchange Maximizing Profits By Minimizing Your Tax Liability The Skinny On 1031 Exchange Maximizing Profits By Minimizing Your Tax
Liability Reviewed by Henda Yesti on July 04, 2018 Rating: 5

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