Nubricks Blog - What should be known about 1031 Exchange properties?

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21 Sep 2017

What should be known about 1031 Exchange properties?

The 1031 exchange is basically happening when a business asset or an investment asset is swapped for another one. Most of the swaps are going to be taxable but when you are eligible for 1031 there will be limited tax present or zero tax. Because of this, 1031 exchange property is highly valuable for larger real estate investors.

There are many things that should be known about 1031 exchanges and the truth is that professional help is normally going to be needed to deal with all the possible complications. However, some things that you should be aware of include the following.

1031 Is Not Intended For Personal Use

This special provision is not going to be applicable unless talking about business and investment properties. Swapping the main residence you have when you want to buy a new home is not possible. However, using 1031 is possible for vacation home swapping, even if the loophole is now really narrow.

Personal Properties Can Qualify

Real estate properties make up the majority of 1031 exchanges but there are personal property exchanges that could apply, like art works. Other property types, like partnership interests or corporate stocks cannot qualify.

Like-Kind Varies

In 1031 exchanges the type of the exchange needs to hold the “like-kind” label. This is quite enigmatic as a used phrase and will usually not actually mean what you believe. Exchanging apartments for land is possible, just as when you exchange for strip mall property or ranches. However, you cannot exchange for another apartment, unless it is designed for rental income. Rules are definitely liberal since you are allowed to exchange a business for another business but different traps are going to appear and you have to be wary of what is “like-kind” and what is not.

Delayed Exchanges Are Possible

In a classic setting the exchange is basically a property swap between two parties. The problem is that it is really difficult to find the exact property type that you are interested in. This is why many of the 1031 exchanges will be three party, Starker exchanges or delayed exchanges. With the delayed exchanges a middleman is going to hold cash after the property is sold and that money will be used when the replacement property is found. The three party 1031 exchange is seen as a swap and is used when a seller for the current property is available but a like-kind property for swap is not yet found.

Replacement Property Has To Be Designated

Two really important timing rules have to be observed if the exchange is a delayed one. For starters, replacement property has to be designated. After the property is sold and an intermediary gets the cash, the money cannot be accessed until 1031 exchanges are set to happen. The second thing to remember is that the replacement property has to be designated in writing with the intermediary, highlighting what property is to be bought.

Property Closure Has To Happen In 6 Months

It is important to close the brand new property purchase in 6 months after selling the initial property or you will not be able to eliminate taxes. As the property sale closes, you need to find something suitable really fast.
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