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What You Need to Know Before a 1031 Exchange Every U.S citizen is subject to many tax laws, and section 1031 is one of the most popular provisions among investors. Realtors, investors and title companies recognize this law because it accrues them certain benefits. Truth be told, the 1031 exchange is very important in promoting investments within the country. This is because this law allows business people to swap a business asset or investment for another asset. Such a swap is no taxable since the exchange can be done without recognizing a capital gain. This process allows investments to grow, but certain rules always apply to ensure that the provision is not being misused. Below are some tips on important things to remember when making a 1031 exchange. The 1031 provision is meant for swapping investment property as opposed to personal property. This means that you cannot swap your home for another. Regardless, there are some loopholes that can be exploited to allow the exchange of personal property. A a tax expert will be I a better position to help understand the exchanges that are legally possible. One an important rule is that assets being exchanged must be of the like-kind. The term like kind is enigmatic in the sense that a building and raw land could be considered like-kind as long as they meet the criteria set out in the law. The 1031 exchange allows for people to do a delayed exchange. In this type of exchange, a sale of the property is made, but another party holds the cash for the owner. The money received after selling the initial property is used to buy another property. The transaction of this kind is treated as a swap. When doing a delayed exchange, it is important to follow the rules set out in section 1031. One such guideline is that the owner of the asset should not hold any cash after the sale of the asset because doing so could spoil the 1031 treatment. The designation of the required property is also a requirement under the law. One can designate more than one property provided that they are all within the confines of the law.
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It is also important to know that all 1031 exchanges must be done within six months. Due to this, every swap should be meticulously prepared so that the transactions can be completed within this time frame. In a delayed exchange, any cash that is left after the new property is bought is taxed since this is also considered to be a gain. Last but not least, considerations must be made for mortgages and other debts attached to the property. So when you get property with lesser obligations, the reduction in obligations is treated as a gain which is taxable.Learning The Secrets About Funds