Property Exchange Under 1031
The 1031 exchange is a technique used in the real estate investment sector. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. For this to be successful, there are rules that accompany this process in order.
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. 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. The like kind characteristic means that the investment property should serve the function of business and investment only. For an investor who wishes to defer tax payments all through their investments, it is possible as the procedure can be repeated for as long as they wish to following the necessary rules. The property that the investor sells under the 1031 exchange is called the down leg property. The up leg property is that which is purchased in the 1031 exchange technique.
1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. As a result of this, passive income on the investments is at all times assured to the investors. 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. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
There are instances in which one loses their property in real estate to fires and thieves. This calls for the investor to put in place a replacement property to the lost 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. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.
Reference: A Beginners Guide To Options