Property Exchange Under 1031
In the real estate investment sector, the 1031 exchange technique is often employed. When using the technique, the investor defers to pay the required taxes on the sold property in a legal manner. For this to be successful, there are rules that accompany this process in order.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. According to the law, the closing escrow of the new investment property is one hundred and eighty days. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. It is possible to use this technique as many times as possible on an investment and in this way, the investor is always assured of not paying required taxes throughout their investments. The initial investment property sold in the 1031 technique is called the down leg property. In the same way, the property that is obtained with the proceeds is called 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. This is the income generated without having to struggle to create the means of its obtainment. 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. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
There are instances in which one loses their property in real estate to fires and thieves. This means that the investor would have to replace the lost investment with a replacement property. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. It comes at an immense cost to the investor as most times replacement properties are more costly than the initial down leg property. There are times that the affected investor would intent to defer the taxes associated so they would have to use the 1031 exchange and transfer the investment from the lost property to the new one in the constraints of the technique.
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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