Following The 1031 Exchange Requirements
Anyone who is interested in entering into a 1031 exchange
arrangement must ensure that he understands the legal
requirements associated with it. This is absolutely essential
if the person is interested in availing the
tax benefits he gets due to this exchange from IRS.
Availability of trained exchange specialist and qualified
intermediary has made this task relatively easy. One can expect
to save considerable amount of money following strictly the
exchange norms and this amount can be used for purchasing a
better property.
The fundamental principle behind which this 1031 exchange
law operates is that when you sell your property the sale
proceeds should be utilized for reinvestment by purchasing a
new and better property. The main idea behind is investment and
not profit making. The law also stipulates that the new
property bought should be either of same value or higher value than the sale
amount. In case a gain exist between sale and purchase it is
liable to be taxed or fined.
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 a
leased home and propose to buy one or more apartment buildings
and also of higher value, there is no restriction
in this type of transaction. Similar examples could be purchase
of molding press against a sale of another molding press and
purchase of forestland against sale of beach land. However, you
cannot conduct exchange trade in cattle vs. boat, land vs.
apartment buildings, truck vs. machine etc. which are un-like
kind of trade. The sale value and purchase value need not be
the same. Purchase value can be higher than sale value. You
could sell more properties and create a single property.
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. Whenever such long periods are required, the
qualified intermediary holds the profits from the initial sale.
This is due to the fact that in case seller holds the money for
long periods it will be considered as profit and taxed.
The 1031 exchange can either be done by the person concerned
or with the assistance of an expert. In case the person has decided
to go on his own, it is strongly recommended that he attends
classes and learn more about the 1031 exchange requirements.
Lack of knowledge will land him in a soup with IRS. Any attempt
to avoid tax using this process will attract severe tax audits
and levy of fines.
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