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Some Things to be Aware of the 1031 Exchanges

Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. Those are just new to this surely wonder and they wish to know more about this. They hear investors, realtors, attorneys and others say this but they are not very clear on what the process would include.

Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under such normal circumstances, the sale of such assets would actually incur tax liability on any capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. But, it is really important to note that the 1031 exchange is not a tax avoidance scheme. When you would sell the investment asset or the business and you won’t replace this with another property, then you will pay for the capital gains taxes.

There are really many things that you may not understand with the 1031 exchange and such is the reason why it is wise to ask for help from the professional who is experience with such transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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You must know that this is not for personal use. Though you would get tempted to think of trading your residence and avoid dealing with the capital gains, such 1031 is jus available for the property that is held for the business or the investment use.
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There are also some exceptions to the personal use prohibition. Just similar to most things in the IRS code, you should keep in mind that there are exceptions to the rule. Know that personal residences don’t actually qualify, you may a successfully exchange such personal property like tenancy-in-common or that piece of artwork.

You have to remember too that the exchanged property must be like-kind. This is one area that those new investors find confusing. Such term like-kind doesn’t mean exactly the same but this would mean that the exchanged property must be similar in scope and use. The IRS rules may be liberal but there are so many pitfalls for those who are not so careful.

You should also keep in mind that the exchanges don’t happen at the same time. A very important advantage is that you may sell the present property and get about six months to close such acquisition of the like-kind replacement property. This known as delayed exchange. When you want to complete such exchange, then you will need the help of an intermediary who is qualified.