Understanding Exchanges

A Few Things that You Should Know Regarding the 1031 Exchange Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. Also, there are those who are only new to the game and they also wonder what this is about. They hear investors, realtors, attorneys and others say this but they are not very clear on what the process would include. The 1031 exchange would permit the investor to swap such business or the investment asset for another one. Under such normal circumstances, the sale of such assets would actually incur tax liability on any capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. However, it is quite important to take note that such 1031 exchange is actually not a tax avoidance scheme. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due. There are several nuances to the 1031 exchange and you have to get the assistance of the professional who has experienced in these transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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You need to remember that this isn’t for personal use. Though it can be tempting to consider trading up the primary residence and also avoiding capital gains liability, the 1031 is just available for property held for business or the such investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just the same with a lot of things in the IRS code, the are exceptions to the rule as well. The personal residences don’t qualify, you can also successfully exchange the personal property like the interest in a piece of artwork or tenancy-in-common. You must also keep in mind that such exchanged property should be “like-kind”. This is an area which would sometimes confuse those new investors. The term like-kind won’t mean the same but such means that the exchanged property should be the same in scope as well as use. IRS rules can be liberal but there are various pitfalls for those who aren’t very careful. You must also remember that the exchanges don’t actually happen concurrently. A very important advantage is that you may sell the present property and get about six months to close such acquisition of the like-kind replacement property. This known as delayed exchange. If you like to complete this exchange, then you need the help of such qualified intermediary.