re you finding it hard to pay taxes for your investment property, and are keenly searching for a reliable option to defer the same? If so, then it is high time that you opt for any of the 1031 exchanges. The 1031 exchange definition stems from Section 1031 of the United States Internal Revenue Code. It states that if you exchange any of your qualifying properties, it may keep you from paying the losses or capital gains due on upon sale till some time. Eventually, you manage to defer both the state as well as federal capital gains taxes that are otherwise associated with every sale of the investment property. The properties thus exchanged must be “like-kind”, which indicates the identical character or nature of the property, irrespective of quality or grade. Among the properties that do not qualify for 1031 exchanges, include bonds, stocks, LLC interests, inventory or trade stocks, and personal residences.
To get detailed 1031 exchange information, it would be worthwhile to know its five types, as given below:
Simultaneous 1031 exchange
As the name suggests, in this type of 1031 exchange of properties, both the practices – the selling of relinquished property and the acquisition of replacement property, take place at the same time. It is the original form of 1031 exchange, but at times, it may be difficult to follow, especially in the instances where the involved parties reside in different locations. Any such situation makes the property transaction a complex affair. Considering the nature of this 1031 exchange, only one party can involve actively in the transaction.
Delayed 1031 Exchange
It is the most common 1031 exchange that includes a simple swap of property between two parties. However, the chances for finding a person with the exact desired property are often bleak, which ultimately leads to delay in the transaction. This swap often takes place with the help of 1031 exchange companies, which handle the cash after the property is relinquished and uses this money to buy a replacement property for its client. Owing to the possibility of delay in this entire process, the involved parties are given a 180-day window. However, the replacement property needs to be identified well within 45 days of the transfer of the relinquished property. The role of 1031 exchange firms thus becomes more important, so as not to get the deal delayed more than the permissible time.
This 1031 exchange allows the parties to structure a transaction, in order to sell the relinquished property and use the proceeds thus obtained to gain the replacement property. The proceeds may also be used to improve the structure of the replacement property thus acquired. These changes may range from a simple repair work on the existing structure to a complex ground-up new construction. If someone gives you similar 10301 exchange information with the name of construction 1031 exchanges or build-to-suit 1031 exchanges, do not get confused, all these are the different names of improvement exchange. Due to intricate tax-deferred strategies in this form of exchange, it is better to seek the assistance of experienced 1031 exchange companies for hassle free transaction.
Personal property 1031 exchange
Besides 1031 real estate exchange, which is common, the exchange of personal property is also a possibility. The last decade has witnessed an appreciable surge in the number of transactions taking place under personal property 1031 exchange. A major credit for this rise goes to the awareness among the small and big businesses as well as individuals, about the benefits they can get in income tax through this vital tax-deferred strategy. At present, of the total volume of transactions, personal property exchange alone accounts for around under 3%, which is appreciable. The popularity of this exchange is expected to proliferate in the next decade as well, as has been inferred by various research works. Just to add to your 1031 exchange information regarding personal property, it may be categorized into depreciable and non-depreciable. While the former one includes tangible personal property, the latter includes non-tangible property.
In a unique case of 1031 exchanges, the involved people or businesses buy replacement property before they relinquish the initial property. This particular instance in the United States Internal Revenue Code is termed as reverse exchange. There may be varied reasons for the exchangers to opt for this method. These may include:
- The desire of the exchanger to buy the replacement property, despite his inability to search for a customer for old property
- The need for improvements in the replacement property
- Inability to close the deal on replacement property, resulting in the apprehensions of loss of money deposits
Summary: Awareness of 1031 exchanges is important if you are looking forward to perform a property transaction. Proper knowledge five different types of 1031 exchanges in this regard are therefore worthwhile, perhaps profitable.