Important Things You Must Know About 1031 Exchanges
Tax specialists may be able to properly spell out the whole Internal Revenue Code Sections, but most of the people will never know more beyond 401(k). (Yes, the workplace retirement savings plan that you have has actually been named after a section found on the tax code.)
So what exactly is 1031? To say it broadly, a 1031 exchange (also known as a like-kind exchange) is swapping one business or investment asset for another one. Although you might have known of most swaps being taxable as sales, if the exchange is within 1031, you will either be required to pay limited tax or you may actually have no tax at all at the time of the exchange.
With this, you may now change the form of your investment without you having to cash out or recognize a capital gain. And this will then allow your investment to grow with deferred tax. The best thing is that you don’t have to worry about how many times can you do a 1031 because there’s actually no limit to it.
You also need to understand that there are complications doing a 1031 which is why it will be necessary for you get some help from a professional. Below are some very important things you should know if you’re considering a 1031 or just curious about it.
1031 Exchange Is Not For Personal Use
You should know that this is for investment and business property only, which would mean to say that there is no way for you to swap your primary residence with some other home. There may be ways for you to use a 1031 in a way that you can swap vacation homes, but even so, it could be very limited in a way that the process might be tricky.
But there are personal properties that may qualify
1031 exchanges deal with real estate most of the time. But some personal property can qualify for some exchanges (like for example, a painting).
There is a broad meaning when you say “like-kind”
Most of the exchanges done is of “like-kind” which may not actually mean what you supposedly think it means. With this exchange, you can actually exchange a ranch for a strip mall, or even an apartment building for a raw land. The rules can be that liberal. But again, there could be traps everywhere if you proceed without an expert helping you.
You can choose to do a ‘delayed’ exchange
These kind of exchanges are simply the swapping of a property of one person for the property of another person. But the truth of the matter is that there is a very slim chance for you to find another person who has the exact property you want as well as who also wants that very property you have.