5 Things to Know About 1031 Exchanges

samtheguestblogger By samtheguestblogger, 21st Jan 2014 | Follow this author | RSS Feed
Posted in Wikinut>Money>Tax

The Internal Revenue Code addresses the exchange of specific types of property in section 1031. This section can help individuals defer capital gains or losses due upon sale, which allows one’s investment in a property to grow untaxed. Here we’ll discuss 5 key points of the 1031 exchange and how it can be used.

1031 is Not For Personal Use

When it comes to 1031 exchange real estate properties, they can only be used for investment and business reasons—not personal homeownership. That being said, most 1031 exchanges are real estate, but some other property also applies. Expensive items such as paintings can also be tax-deferred, as long as they are exchanged for something of a similar nature.
1031 Exchanges Are Exchanges of Items of a Similar Nature
That being said, the rules are pretty liberal. Different types of property can be exchanged, even if they are very different in setup. One business can be exchanged for another as well. The specific like-kind rules of exchange include stipulations such as that livestock of different sexes cannot be exchanged as like-kind, and that property outside the United States cannot be exchanged for property within the United States.
Certain types of exchanges cannot be used as a 1031 exchange. These include inventory or stock in trade, stocks, bonds, or notes; debt, partnership interests, or certificates of trust.
The Exchange Period Must Occur within a Specific Amount of Time
A 1031 exchange begins on the date that the deed is recorded, or that possession of the property is transferred to the buyer. Within the first 45 days, the seller must identify potential replacement properties. The exchange period ends 180 days after commencement, or on the date that the tax return is due for the taxable year in which the property was transferred. The only way this deadline can be extended is in the case of a presidentially declared disaster.
You Must Report 1031 Exchanges to the IRS
To report an exchange to the IRS, you must fill out a Form 8824 during tax time. This form asks for a description of the properties, dates of the exchange, any relationship between the exchangers, the value of the properties, gains or losses of non-like-kind properties, cash received or paid, and realized gain on the property given up.
If you do not understand the specific terms of the process, you should seek counsel. Individuals will be held liable for taxes, penalties, and interest on properties exchanged.
Nearly One-Third of All 1031 Exchanges Fail
Tight IRS deadlines and the challenges of competition can spell disaster for an exchanger. Without a plan, 45 calendar days can fly by. Without an identified replacement property (plus up to 3 backups in case the first one doesn’t work out), a 1031 exchange cannot be processed. Finding a suitable replacement property that is of equal or greater value is critical to the success of an exchange.
It’s important to have backup and educated counsel on hand to help with the exchange process and ensure a seamless and successful transaction. Good luck!


1031, 1031 Exchanges, Taxes

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Sam is an avid blogger that loves to share information with his readers that will apply to their daily lives.

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author avatar Fern Mc Costigan
22nd Jan 2014 (#)

Interesting post and informative as well!

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