How To Use A 1031
Have you ever used the 1031 before? Do you even know what it stands for? The 1031 refers to the section 1031 of the Revenue code. According to this code, those property owners who sell their investment property will not be subjected to the capital gains tax if the proceeds of the sale shall be used to purchase a similar investment property. However, there are rules and guidelines that need to be met first before he can enjoy this.
What property to purchase?
As mentioned earlier, the property owner has to purchase a similar property or a like kind property. This property has to be identified within 45 days on the closing of the initial property. It does not need to exactly the same with the property sold. Selling an unimproved land, does not mean that you have to purchase the same. As long as it is an investment property, that meets the condition and rules of the 1031 exchange. The IRS has provided a broad meaning and interpretation for the said property, which the investors can use to their advantage.
What is a qualified intermediary?
The qualified intermediary or the QI is a middleman. The proceeds of the sale have to be given to him. The amount that has not been given to the QI shall be subjected to taxation. He will have the fund in escrow until the closing for the new property is made. Additionally, he is also tasked to help the buyer with the various paper works to ensure that the transaction will not have problems.
Additional rules of the 1031 exchange
In addition to purchase a like kind property, which has to be determined within 45 days on closing, it should also bear equal or even more debt than the first property. Moreover, the closing of the second property has to be conducted within 180 after the closing of the first property took place.
Using the 1031 Exchange
Many investors are now using the 1031 exchange to manage investment properties. With this, they can sell their current investment property to purchase a new one. If you want to use this to your advantage, you have to be familiar with the conditions set by the code. You have to tell the other parties if you are going to use this, whether they are the buyer or the seller. You have to indicate this in the notification to other parties. This is essential so that the other parties will be aware of why you entrust the transaction to a QI. It will also make them aware that they are bound by law to cooperate with him. Once the transaction is done, it will be filed together with the tax return using the form 8824.
Many can benefit from the 1031 Exchange. However, you have to be familiar with its rules. Remember, you only have to purchase a like kind property so that you will not be subjected to capital gains taxes. In addition, you have to make sure that you comply with the rules set.
