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What You Need to Know Before a 1031 Exchange Tax laws are very broad, and section 1031 is one of the most widely discussed provisions of the tax laws. This tax law is mentioned widely by realtors, investors and title companies like it is very important. Well, the truth is that it is very important in promoting investments in the United States. This is because this law allows business people to swap a business asset or investment for another asset. Such a swap is no taxable since the exchange can be done without recognizing a capital gain. Doing this allows your investment to grow, but you have to remember that there are special rules that apply. Below are some tips on important things to remember when making a 1031 exchange. The 1031 provision is used to swap investment assets and thus little or no application for personal use. This means that you cannot swap your home for another. That said, if you are looking to 1031 your personal property, there is some property that qualifies. You should, therefore, consult with a tax expert to help you with the exchange. The general rule when making any exchange is that the assets must be of a like-kind. The term like-kind is inexplicable because it incorporates a broad definition of a building and raw land could be considered like-kind although they are essentially not similar. There is also a possibility of doing a delayed 1031 exchange. In this exchange, an individual will sell their asset but use a middle man to hold the cash received for the sale. The money received after selling the initial property is used to buy another property. Such a transaction is treated as a swap. When doing a delayed exchange, it is important to follow the rules set out in section 1031. One important rule is that the owner of the asset cannot hold the cash received after the sale of the asset since doing so will spoil the 1031 treatment. You are also required to choose a property that you wish to acquire. One can designate more than one property provided that they are all within the confines of the law.
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A maximum of six months is allowed for a swap to take place under the 1031 exchange provisions. It is, therefore, advisable that you make a swap when you have everything in order. In a delayed exchange, any cash that is left after the new property is bought is taxed since this is also considered to be a gain. The 1031 exchange also considers the mortgages and loans that any property could be having. This means that if you exchange a property and your liabilities reduce, the reduction is considered a gain which is taxable.Learning The Secrets About Funds