Three 1031 Exchange FAQ For Better
Understanding Of The 1031 System
One can hear different versions of stories about 1031
exchanges without going through the details of exchange law. This article gives
details of some of the more commonly asked FAQs on this
subject. Anybody reading this must be clear in mind that this
article gives only a basic understanding on this subject and
cannot be considered as a substitute for 1031 exchange laws or
replacement of 1031 exchange specialist.
FAQ 1 - The 1031 exchange law stipulates that selling and
buying should be for property similar in nature. But it is not
necessary that they have to be the same type or value for
concluding a transaction. For example, in case you sell an
independent house and propose to buy one or more apartment
buildings and also of
higher value, there is no restriction in this type of
transaction. However, one cannot purchase cattle using the sale
proceeds of a residential house. Persons may be interested in
selling an independent house and purchase an apartment building
with multiple renters because of the increased income they
could get.
A number of 1031 exchanges have taken place for properties
of equal value; however, this is not universal. A lot of other
transactions of lower sale value and higher purchase value have
also taken place. One can deposit the full sale amount of the
property as down payment with a 1031 exchange and this permits
him to purchase a superior building. In case he does not follow
1031 exchange process, he can use only the amount available
after deduction of taxes and this means the funds available for
purchase is relatively less thereby permitting him to
purchase a
property inferior in nature.
FAQ 2 - Another issue that arises in this transaction is the
time factor. There is a time period fixed for purchase of a new
property after the sale
of old property and this period has been fixed as a maximum
of 45 days after sale. In case if a person entering into such
exchange finds it difficult to complete the transaction in this
time frame and if he still is interested in procuring the new
property he should make a list of properties he is interested
in and submit to the authorities concerned before 45th day.
This is to inform the government and company that the
transaction is for investment and not for profit. However, he
should complete this transaction within 180 days otherwise his
1031 exchange will be terminated and properties taxed.
FAQ 3 -The purpose of 1031 exchange is to encourage people
to purchase new property using the sale
proceeds of their old property. Persons selling their
property cannot do this for making profits. Any profit made in
the process has to be accounted for and taxed. This means that
the sale income cannot exceed the purchase cost of the new
asset.
The above FAQs are basic to 1031 exchange and one must have a
comprehensive understanding of the Do’s and Don’ts of this
system before venturing into this exchange.
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