Important Tips About The 1031 Exchange

The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also referred to as the Section 1031 exchange. The application of the 1031 exchange is the first thing you need to understand before proceeding. After selling a property, an investor or business person will get profits which can be used in the purchase of a property that is the same or similar to the one they just sold hence reducing tax. This explains why it is identified as the exchange of like-kind property of equal or greater value. There is a law that governs the implementation of the 1031 exchange. According to the law, after an investor receives money from the property they just sold they will need to identify the property they are going to buy within 45 days. After identifying the replacement property, you will have 180 days to purchase it according to the law. The application of this tax code is done in the 8 step process. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.

To begin this process, the investment property will be sold by the owner. The money that shall be received as capital gains from the sale of investment property shall be received by a qualified intermediary in the second step. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. To begin the 1031 exchange, you will need to send a duty letter to the middleman. It is at this point where you will be able to negotiate with the seller of the replacement property. After an agreement is reached on the amount of money to be paid, the middleman shall forward the capital gains to the title company. Filling out the IRS Form 8824 is the last step in this process.

The capital gains of selling a property are usually taxed in the long-term or short-term, but with the 1031 exchange you will be able to defer such payments hence saving a lot of money. You’ll also avoid paying tax on the amount of depreciation that is claimed on the property. Find out more about this topic here.