A: 1031 Exchange is a method for selling a property and then buying another property within a fixed time- frame. The United States Internet Revenue code states that 1031 exchange of properties carried out for investment, business, or any other productive use accompanies no gain or loss, since the economic gain that could produce funds to pay any tax has not been achieved. This entire transaction is considered as an exchange or swap of one property for another.
A: While you get involved in a property transaction under 1031 exchange, you can defer the state and federal capital gain taxes related to the relinquished property. Once you delay the tax, you can get more money that you can invest in any other property.
A: The property exchanged under this law must be “like-kind”, which indicates that the property should be identical in nature or character, immaterial of property or grade. From a vehicle to a ball team trade, to an investment property, all qualify for 1031 exchange.
A: Property that is held specifically for sale, such as bonds, stocks, inventories, securities, etc., do not qualify for the exchange.
A: Five main types of exchanges under section 1031 include simultaneous exchange, delayed exchange, improvement exchange, personal property exchange, and reverse exchange.
A: When the trader relinquishes a property on one date and then buys a replacement property on some other later date, a delayed exchange of properties takes place.
A: It is also widely known with various other names such as, “Starker Exchange”, “Deferred Exchange”, or “Like Kind Exchange”.
A: Considering the time consuming job of searching for the like-kind property in a delay exchange, the role of 1031 exchange firms becomes important. They take care of the cash for relinquished property, search for a befitting replacement property, and use the same cash for buying the replacement property.
A: The maximum permissible time for a property transaction to complete in a delayed exchange is the tax filing date, or 180 days of exchange period; whichever is earlier. However, it is essential for the exchanger to identify the potential replacement property within 45 days of closing the sale of relinquished property. This particular period is called as identification period and is included within the exchange period of 180 days.
A: In order to qualify for a 1031 exchange, the exchanger need to comply with any one of the three identification requirements, which include:
A: The rule allows the exchanger to identify at the most three like-kind replacement properties. It does not set any limitation on market value of replacement 1031 exchange properties.
A: This rule allows the traders or the 1031 exchange companies (on the former’s behalf) to identify more than three potential like-kind replacement properties, on the condition that the total FMV of all the identified properties is less than 200% of the price at which the relinquished property was sold.
A: This rule comes into existence when the number of like-kind replacement properties identified exceeds both the Three property rule, as well as the 200% of FMV rule. It considers the property identification as valid for 1031 exchange if the exchange acquires a minimum of 95% of the fair market value of all the identified replacement properties.
A: Traders, opting for delayed exchange to defer their capital gain taxes on the relinquished property should abide by the following important steps with the help of 1031 exchange firms:
At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.