Following The 1031 Exchange Rules
In case a person or a business is interested in availing
the benefits of tax deferral specified in section 1031 of IRS
(Internal
Revenue Service) tax book he has to scrupulously follow the
exchange rules given in this tax book. The rules in this
section help the investor in investing more and do not
discourage his investment. However, it discourages investors
who avoid paying taxes. Since the process involves a large
amount of legal complications it is worthwhile to entrust it to
a professional in that field who understands the nuances of
this law well.
The first of these 1031 exchange rules defines 1031 property
exchange. 1031 exchange rules (1) (a) defines the basic
requirement for the 1031 property exchange and specifies that
no loss or gain shall be recognized in the exchange of
like-kind property. This means that you cannot buy a
replacement property at a lesser price than the sale amount of
original property thereby resulting in a profit to the seller.
However, the property purchased can be of higher value than the
sale value as long as the buyer can tie up his additional funds
requirement.
The second rule talks about the term like-kind of the 1031
exchange program. This rule stipulates that the exchange as
defined in this law of two properties can be done only if the
properties are similar in nature. However, they need not
necessarily of the same value. For example, exchange
transaction of cattle and building are not permissible and in
such a transaction one is destined to pay tax on the
property
sold. In contrary, one can purchase a mall using the
sale proceeds of a building and since these are of similar
type they are eligible for tax deferment.
1031 exchange rules also have specified timeframe for
transactions coming under this umbrella. Although these
restrictions do not come into picture at the time of initial
exchange one should be aware that for a valid exchange the
whole process of transactions has to be completed within 45
days of selling the property. In case the person requires more
time for completing the deal, he should give a short list of
properties he is interested in to the qualified intermediary on
the 45th day. The finalization of the deal has to be done
before 180th day and the party with whom the exchange is
finalized should be one of those in the list given to the
intermediary. Otherwise he has to pay tax on the sale amount.
Although the 1031 exchange
rules appear to be difficult to manage, there should not pose
any serious problem once you understand the dos and don’ts of
this rule. As per this rule, neither the purchaser nor the
seller has the authority to handle money and have to be
deposited with the qualified intermediary. In emergency
situations, these intermediaries also protect the persons using
safe-harbor laws. Further, since these people are qualified in
the field they follow rules diligently thereby preventing any
audit queries.
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