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Important Knowledge to Help You Understand 1031 Exchanges There are many tax laws that apply to different areas and section 1031 is one of the most popular provisions. This tax law is mentioned widely by realtors, investors and title companies like it is very important. Well, the truth is that it is very important in promoting investments in the United States. This is because this law allows business people to swap a business asset or investment for another asset. The the benefit of this law is that you can swap the asset without having to pay immediate tax since capital gains are not recognized. Doing this allows your investment to grow, but you have to remember that there are special rules that apply. Before you think of making an exchange, here are a few rules of engagement that you should follow through. The 1031 provision is used to swap investment assets and thus little or no application for personal use. This means that you cannot swap your home for another. That said, it is possible to exchange personal property as long as certain conditions are met. A a tax expert will be I a better position to help understand the exchanges that are legally possible. The the general rule is that the assets being swapped must be of like-kind. While 1031 exchange is only for like-kind, the term has a very broad definition which means that something like a building could be considered like-kind with raw land. There is also a possibility of doing a delayed 1031 exchange. In this exchange, an individual will sell their asset but use a middle man to hold the cash received for the sale. The proceeds from the sale are used to purchase another property that the owner of the previous property is interested in. 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 important rule is that the owner of the asset cannot hold the cash received after the sale of the asset since doing so will spoil the 1031 treatment. You must then designate a property that you would like to acquire. You can also designate as many properties as you wish as long as they meet the criteria set out under law.
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It is also important to know that all 1031 exchanges must be done within six months. This means that you must only make the exchange when you have everything in order. Also remember that in the case of a delayed exchange, any cash that remains after the replacement property is bought must be taxed. The 1031 exchange also considers the mortgages and loans that any property could be having. So when you get property with lesser obligations, the reduction in obligations is treated as a gain which is taxable.On Finances: My Rationale Explained