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.The 1031 exchange is however restricted to properties that are the same or alike.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.For the 1031 exchange to work, an independent third party member called the qualified intermediary must be involved.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.The second rule indicates that for the 1031 exchange to work, the new property must be equally or greatly valued than the old one.The third rule entails that the equity of the sold property be equal or less than the equity of the newly acquired property.
The debt of the old property must also be less or equal to the debt of the new property acquired.Another requirement in the 1031 exchange is that the replacing property should be identified in a time line not exceeding forty five days. 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. To avoid the 1031 exchange to fail, the investor should adhere to the time given and make sure all the transactions meet the deadlines.
The 1031 exchange is also accepted when it comes to vacation homes.The law requires that when exchanging for residential homes, the owner should rent it out and can only occupy it for a period not exceeding fourteen days annually.In case there is any cash remaining after the investor has successfully purchased a new business or property, then it is required by law that the remainder should be taxed.
There are many property management companies that deal in the 1031 exchange properties. In Coeur d’Alene, Idaho, there is a company called 1031 Gatewaythat specialises in the 1031 exchange investments.