Some Things to be Aware of the 1031 Exchanges Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. Also, there are those who are only new to the game and they also wonder what this is about. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves. Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under a normal situation, the sale of such assets would have tax liability on capital gains. But, when you are able to meet the requirements that you can find in the section 1031 of such IRS tax code, you can then defer the capital gains tax. It is imperative that you keep in mind that the 1031 exchange isn’t a form of a tax avoidance scheme. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due. There are several nuances to the 1031 exchange and you have to get the assistance of the professional who has experienced in these transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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Keep in mind that such is not for personal use. Even if you are tempted to consider trading up your primary residence and avoiding the capital gains liability, the 1031 is only available for such property held for business or investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just similar to most things in the IRS code, you should keep in mind that there are exceptions to the rule. The personal residences don’t qualify, you can also successfully exchange the personal property like the interest in a piece of artwork or tenancy-in-common. You have to remember too that the exchanged property must be like-kind. This is an area which would sometimes confuse those new investors. The term like-kind doesn’t actually mean exactly similar but this means that such exchanged properties should be the same in use and scope. The IRS rules may be liberal but there are several pitfalls for those who are not quite careful. You should also keep in mind that the exchanges don’t happen at the same time. One of the important benefits is that you may sell the present property and have up to 6 months to close the acquisition of the like-kind replacement property. This known as delayed exchange. You must get the help of such qualified intermediary when you like to complete the exchange.