An ideal investment is one that not only guarantees a steady flow of income but also creates possibilities for higher returns. An investor can’t ask for more if all these benefits come with an added advantage of tax deferment. A 1031 exchange makes all these things possible.
1031 Exchange Definition
Section 1031 of IRC, commonly known as a 1031 exchange or a tax-deferred exchange, lets investors defer capital gains taxes on exchanging an investment property for another like-kind property. The only condition is that properties involved in a 1031 exchange must be held for use in trade, business or for investment purposes. Plus, both the relinquished and replacement properties must be like-kind. While personal properties don’t qualify for a 1031 exchange.
Time is what you should fear while doing a 1031 exchange –
How could anyone forget deadlines when referring to 1031 exchanges? Time has a crucial role in 1031 exchanges as the entire transaction needs to be completed within the specified time limit. As you may know, the first step of a typical 1031 exchange requires you to sell the relinquished property. Once the relinquished property is sold, the investor gets a time limit of 45 days for identifying potential replacement property or properties. This window of 45 days is known as the ‘identification period.’
Once the replacement property is identified and a written identification of the property, containing its street address, is sent to 1031 Corp, the investor needs to acquire the same. The deadline for acquiring the replacement property is 180 days, which begins the day the relinquished property is sold. So, after the end of the identification period, the investor has only 135 days in hand to close the exchange.
1031 exchange investors receive the following benefits:
Tax advantages – 1031 exchanges are mostly popular for tax benefits. 1031 exchange investors get the opportunity to defer capital gains tax for as long as they want (even till last breath). However, to enjoy the tax benefits, an investor must reinvest 100% of their sale proceeds on the replacement property. Any reserved cash or withdrawal of sale proceeds for other purposes will result in ‘boot’ and eliminate the possibility of deferring capital gains tax.
Increased cash flow – A 1031 exchange allows investors to acquire replacement properties situated in any part of the entire USA. Therefore, a property located in an improved location will generate more revenue than the one located in the countryside.
Choose from different 1031 options – 1031 exchanges aren’t limited only to one kind. An investor can opt for any 1031 exchange out of four options – Delayed, Simultaneous, Reverse, and Improved exchange. An investor must choose a 1031 exchange that is most appropriate for them. It’s evident that doing a 1031 exchange on an investment property is far more beneficial than going for a direct sale. All you need to mind is the deadline associated with this unique tax-deferred exchange.
1031 Exchange Experts, 1031 Exchange Property for Sale 