1031 Is Not That Basic
In this tough economy people are looking to save as much money as possible, but it is not always that easy. Some people make it even tougher on themselves by their own ignorance of tax laws and a stubbornness to do it themselves. In this case, there is often more taxes paid than is necessary In particular there is one way that people often misinterpret. When selling a property and then reinvesting it, it can be sheltered from taxes as long as it is done properly. If you try to shelter some money that does not qualify it could come back to hurt you. The definition of a 1031 tax exchange is to reinvest the proceeds from one sale into another property that is like kind or that will be used for business purposes. One example of this would be that you reinvest money from the sale of one rental property into another rental property. Another key aspect of a 1031 exchange that must be complied with is the time frame. If you want to do a 1031 exchange transaction, then you must identify the 1031 exchange property within 45 days from the close on the original property. Also, you will need to close the purchase of the new property within 180 days. A 1031 exchange is not something that you can do by yourself. In order to qualify, you must use a qualified 1031 company to hold the money in the interim. The main reason for this is to make sure that the money is handles according to the laws. However, it is good to have a 3rd party as a witness anyways to make sure that all is okay with the IRS in how it is done. It is possible for someone to have a gain and still do a 1031 exchange. In this case, the gain that is taken out is referred to as a boot. The boot must be reported and taxes paid on while the remainder can still qualify for the tax exchange. A boot, as it is called in the real estate business, can come about even when you did not intend it to. Sometimes, you sale a property and then in the reinvestment you get a better price on the replacement property and you end up paying less than what you sold the last one for. When that happens, you have a gain. You can also have this happen if the debt is simply reduced on the property that you are about to purchase. One of the hardest and most stressful parts of the 1031 exchange is finding the 1031 exchange property within the limited time frame of 45 days. Once that is done, the stress goes down significantly, but the close on that property needs to happen within 180 days of the closing of the other. If you have never learned about a 1031 exchange or 1031 exchange property, but you buy and sell property, then you should learn a little more so that you can save a lot of money on capital gains taxes. |