The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also identified as the Section 1031 Exchange. The first thing you need to understand in this process is how the 1031 exchange works. After selling a property, an investor or business person will get profits which can be used in the purchase of a property that is the same or similar to the one they just sold hence reducing tax. It is referred to as the exchange of like-kind property and this is the reason for it. It is important for you to recognize that there is a law which governs the application of the 1031 exchange. The identification of the replacement property is supposed to be within 45 days of the payment of the property that has just been sold. After identifying the replacement property, the law proceeds to state that you will have a span of 180 days to close the deal of purchasing this property. The process of conducting a 1031 exchange includes the completion of 8 defined steps. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.
To begin this process, the investment property will be sold by the owner. The sale will involve a middleman who is also supposed to receive capital gains from the sale of this property on behalf of the owner. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. The fourth step of this process will involve you sending a duty letter to the intermediary holding your capital gains, for the 1031 exchange. You will also need to hold negotiations with the party that is selling the property that was identified to be used in the exchange. The seller shall be paid by the middleman using the capital gains after the negotiations yield a suitable price for both parties. The last step in this process is to fill out the IRS Form 8824 so as to complete the process.
The capital gains of selling a property are usually taxed in the long-term or short-term, but with the 1031 exchange you will be able to defer such payments hence saving a lot of money. There is the connection of income tax on the amount of depreciation claimed in the property that can go up to a rate of 25% and using the 1031 exchange will save you from incurring this expense. Read more here.