Property Exchange Under 1031
The 1031 exchange is a technique used in the real estate investment sector. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. For this to be successful, there are rules that accompany this process in order.
The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. A maximum period of six months is issued as the probation period of closing escrow. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The initial investment property sold in the 1031 technique is called the down leg property. The up leg property is that which is purchased in the 1031 exchange technique.
Operating using the 1031 exchange in real estate is common because real estate investments result in investors saving a lot that would otherwise be paid as tax. As a result of this, passive income on the investments is at all times assured to the investors. This is the income generated without having to struggle to create the means of its obtainment. The investor simply ceases to own the down leg property and starts to own the up leg property without the need of extra funds to purchase the latter. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
There are times in real estate where property is stolen or burnt and therefore lost. This calls for the investor to put in place a replacement property to the lost property. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Sometimes the investor would wish to defer the taxes associated with the replacement property and therefore, they would need to do the 1031 replacement exchange where they would transfer the ownership of the lost down leg property to the acquired up leg property under the technique’s conditions.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.
Source: passive income property