1031 Property Exchange

The 1031 exchange is a technique used in the real estate investment sector. When using the technique, the investor defers to pay the required taxes on the sold property in a legal manner. To do so, there are conditions put in place to ensure that the procedure is properly followed.

The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. 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. 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 down leg property is the property an investor disposes using the 1031 exchange. 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. As a result of this, passive income on the investments is at all times assured to the investors. 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. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.

There are times in real estate where property is stolen or burnt and therefore lost. This means that the investor would have to replace the lost investment with a replacement property. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. It comes at an immense cost to the investor as most times replacement properties are more costly than the initial down leg 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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