A 1031 exchange can be described as a legal way in which an investor can sell his or her investment properties and at the same time use the money gained to buy similar investment properties.This is usually done so as to avoid paying the capital gain tax after selling an old property.The 1031 exchange only involves assets that are similar or alike.These may include exchange of businesses, residential and commercial properties, holiday homes and so on.
This also means that the law does not allow the sale of primary residences in exchange for others.The 1031 exchange is also required by law to involve a third party member called the Qualified Intermediary.The qualified intermediary is responsible for holding all the sales earned on behalf of the investor until they can be reinvested in acquiring new property.However any other party that represents the investor is restricted by the internal revenue authority to act as a qualified intermediary in the 1031 exchange.
There are many guidelines used in the 1031 exchange and one major rule is that the money gained can only be invested in acquiring new properties similar to the old ones.Another rule clearly states that property to be acquired must be equal or of a higher value than the one being sold.The other rule is that the equity of the property sold must be less or equal to the equity of the new property.
The debt of the old property must also be less or equal to the debt of the new property acquired.For the 1031 exchange to happen, the property to be bought using the money earned has to be identified within a period of forty five days after the first property sale. The new property should also be bought within a time line not exceeding more than one hundred and eighty days after the selling of the other property. To avoid the 1031 exchange to fail, the investor should adhere to the time given and make sure all the transactions meet the deadlines.
Selling and buying of holiday or vacation homes is also allowed by the law in the 1031 exchange.For a private residence to qualify in the 1031 exchange, the investor can only stay in it for fourteen days a year and rent it out for the other remaining period.It is good to know that once the new property is bought, all the remaining money is taxable.
The 1031 exchange investing is on the rise with a number of companies expressing their interests in it. An example of a company involved in the 1031 investment properties is the 1031 Gateway who are located in Coeur d’Alene, Idaho.