How 1031 Exchanges Work
There are those among us who have an intricate knowledge of the Internal Revenue Code Sections. For most people though, their knowledge ends with a few details on the 401(k). We then seem to want to know more about the Section 1031. This is because it is an important application in the real estate market.
1031 refers to the exchange of one investment property for another. For most real estate swaps you would be expected to pay taxes as you would in a sale. But in case you make sure it is a 1031 type of exchange, then there will either be no taxes to pay or only a little of it to pay. Here are even more facts about 1031 Exchanges you need to be aware of.
This works for only investment and business property exchanges, not the residential kinds. If you intend to live in that house, it will not qualify. There is a way a vacation home can apply here. You will need to first stop using it as such. You then need to lease the house for more than 6 months, in a business-like manner. By using it that way, it shall become an investment property, which now is seen as ready for the exchange. This has some more complexity to it than is apparent. You, therefore, need to consult expert help in it. You need to be aware that it will not work for personal property swaps. There were changes made to the section which led to this new state. There was rampant application in all manner of property.
If you found the Section 1031 Exchanges to be too much to use, you may turn on the Opportunity Zones. Some people find them to be easier to apply. You shall find details on them on this site.
There is also the fact that when they refer to like-kind properties, it does not mean the properties will have to be all the same. You can go for different looking property. A piece of land can be exchanged for an apartment building.
There is the delayed exchange for you to think of. Sometimes, finding someone who has property of similar value and is interested in the exchange can be tricky. You will, therefore, be forced to go for a delayed exchange. There shall be an intermediary who will hold the funds after you release the property, and use the funds to acquire the replacement property for you. It remains a swap in cases where you follow these rules to the letter. First, you must not touch any of those funds, or the exchange is disqualified. The release of your property will then trigger a 45 day period in which you need to have found the replacement property. It needs to be well known which property you refer to. You can have as many as three of them, as long as you close one within 6 months.