1031 Exchange Basics Are Not So Basic
Posted on October 31, 2009
Filed Under Taxes | Leave a Comment
It is becoming tougher for people to keep their money these days. However, some people do not keep as much as they could simply because of their own ignorance. Some people are not aware, understandably, of the tax laws that could help them to protect their re-investment from unnecessary taxes.
In particular there is one way that people often misinterpret. When selling a property and then reinvesting it, it can be sheltered from taxes as long as it is done properly. If you try to shelter some money that does not qualify it could come back to hurt you.
A 1031 tax exchange is the reinvestment of the money gained from the sale of one property to another like property for the same intention. For example, if you wanted to get out of one rental property into another, you could do that and avoid taxes because you really have not gained anything yet.
The time frame in which you complete some steps in the 1031 exchange is a key factor that you will want to consider. You have only 45days from the time that you complete the sale of the relinquished property until you identify the new property that you will be investing in. Also, you only have 180 days to complete the purchase of the new property in order to qualify under the 1031 exchange tax shelter
A 1031 exchange is not something that you can do by yourself. In order to qualify, you must use a qualified 1031 company to hold the money in the interim. The main reason for this is to make sure that the money is handles according to the laws. However, it is good to have a 3rd party as a witness anyways to make sure that all is okay with the IRS in how it is done.
It is possible for someone to have a gain and still do a 1031 exchange. In this case, the gain that is taken out is referred to as a boot. The boot must be reported and taxes paid on while the remainder can still qualify for the tax exchange.
A boot, to more clearly define it, can come in many different ways. For example, it can come when the cost of the new investment is less than the sale of the old property. The extra cash then taken out is called a boot.
One of the more difficult pieces of a 1031 exchange is finding the replacement property within the first 45 days following the sale of the other property. The IRS is strict on this one and will not file extensions on this, so it is a good idea to have a head start on that one before beginning the process.
If you have never learned about a 1031 exchange or 1031 exchange property, but you purchase and sell property, then you should learn a little more so that you can stop spending money on unnecessary taxes.
Comments
Leave a Reply