1031 Property Exchange
When investing in real estate, the 1031 exchange technique is at times put in practice. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. For this to be successful, there are rules that accompany this process in order.
After an investor sells a given property and intends not to incur the tax costs, they have to reinvest the proceeds of the sold property in another new property within forty-five days. A maximum period of six months is issued as the probation period of closing escrow. The new property that is bought is supposed to be of like kind as the disposed one. The term like kind property implies that the property is used in investment and business purposes only. 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. Likewise the property being acquired in the technique is the up leg property.
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. This means that the investors who practice it will always be assured of passive income. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. Therefore the investor has to obtain a replacement property for the lost investment. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. This process clearly costs the investor because replacing is sometimes more expensive than the acquisition of the 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.
1031 exchange relatively is more preferred than the oriental way of performing real estate transactions for how beneficial it is to investors practicing it.
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