The 1031 exchange is defined as the legal exchange of business properties with the same kind of properties using the money or the profits earned from the sale of the first property.This is usually done so as to avoid paying the capital gain tax after selling an old property.This type of exchange can only be used when the business properties exchanged are equal or similar.The 1031 exchange properties can include businesses, holiday homes, residential and commercial real estates.
The sale of individual residing homes in exchange for others is prohibited by law.The 1031 exchange is also required by law to involve a third party member called the Qualified Intermediary.The role of the qualified intermediary is hold the profits that are earned from the sale of the first real estate property until they are reinvested in the second 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 fourth rule in the 1031 exchange is that the debt of the property to be bought be higher or equal to the debt of the already sold property.The other law that must be followed is that the new exchange property must be identified within forty five days after the old property has been sold. The buying of the new real estate property should be done within a period of one hundred and eighty days after closing the deal on the old property. These timelines should be strictly followed because exceeding them can make the 1031 exchange to fail.
The 1031 exchange is also legal when a holiday home owner wishes to sell the current one to buy another holiday home.Privately owned residential homes are only allowed in the 1031 exchange if the owner rents it out and can only reside in it for fourteen days in a year.It is good to know that once the new property is bought, all the remaining money is taxable.
There are many property management companies that deal in the 1031 exchange properties. An example of a company involved in the 1031 investment properties is the 1031 Gateway who are located in Coeur d’Alene, Idaho.