1031 Exchange Basics Are Not So Basic

It is becoming tougher for people to keep their money these days. However, some people do not keep as much as they could simply because of their own ignorance. Some people are not aware, understandably, of the tax laws that could help them to protect their re-investment from unnecessary taxes.

One of the biggest areas of trouble is in real estate, or real property. There are laws that allow people to shelter their money from being taxed if their intent is to reinvest the money gained from one sale of property into another like kind property. This exchange of property is called a 1031 exchange. While it can be very helpful, it must be done right in order to qualify and keep your money sheltered.

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.

The time frame in which you complete some steps in the 1031 exchange is a key factor that you will want to consider. You have only 45days from the time that you complete the sale of the relinquished property until you identify the new property that you will be investing in. Also, you only have 180 days to complete the purchase of the new property in order to qualify under the 1031 exchange tax shelter

In addition to the time requirements, it is also required that the person attempting to do a 1031 exchange obtain a qualified intermediary and use them to hold onto the funds from the sale of the original property. This is done to ensure the interest of the government that no money is gained from the sale under the tax shelter.

However, it is possible for a person to have a gain and still complete a 1031 exchange. It is not advised most of the time, but it can be done. The gain in this case is often referred to as a boot. The boot must be reported and taxes paid on it.

To better understand what a boot it is, it is helpful to understand how this can come about, even without the intention of making this happen. For example, if the property that you invest is less than the property that you sold. Without anything to offset that, it becomes a gain, or a boot. It can also happen in the same case, but instead of cash, the debt is reduced

One of the more difficult pieces of a 1031 exchange is finding the replacement property within the first 45 days following the sale of the other property. The IRS is strict on this one and will not file extensions on this, so it is a good idea to have a head start on that one before beginning the process.

If you have never learned about a 1031 exchange or 1031 exchange property, but you purchase and sell property, then you had better learn some more so that you can save a lot of money on capital gains taxes.