Monday 13 February 2012

1031 Exchange: how does it work

The government wants to incentive the type of real estate investment in the long term. That is why it has created some of the tax benefits that you can profit from.
One of them is that you are allowed to write off the cost of the property over some time thought annual depredation deductions and this could be use to offset other income that you have earned.
When its time to sell your property the best way to make the most of the tax benefit its to profit from the 1031 exchange. When you sell your property and buy a new investment property you can roll the gain from the previous property to the new one without paying the tax until some time in the future. Note that all exchange have to be like kind. For instance it wont be the same if you are selling a property in the US and buying another overseas. The IRS must approve to do this exchange.
The property has to be hold for one year or more and be for investment purposes in order to be eligible to use the 1031 exchange.
There is also the rule of 45 days identification period in which (from the sale of the old property) you have to come up with a list of properties you are interested in buying and replace the property within 180 days. Although this might be quite challenging the IRS doesn't accept any extensions.
Other rules include to use a qualified intermediary and follow the title holding requirements as well as buy a property or real estate of equal or higher value and reinvest all cash.

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