Advantages Of The 1031 Exchange Offered By Specialty Companies
May 1, 2020 (Investorideas.com Newswire) A 1031 exchange is the exchanging of real property that you're currently using for either business purposes or solely holding an investment for another company for another investment property that is 'like-kind.' The term means the properties are the same in nature even if the quality or grade are not equal.
The tool is used largely by real estate investors or companies that specialize in the service such as Capital Square 1031 Exchange. They hold onto properties in the longer term as opposed to those who 'flip'. Many investment teams opt to become 'serial exchangers' using this method as a way to accumulate wealth by replacing older properties with those that are more valuable and in the process deferring tax liabilities. Typically, the owner of the property exchanged needs have had possession for at least a year before beginning the process.
Advantages Of 1031 Exchange
There are advantages for using the 1031 exchange as well as a few cons. If done properly, there is the potential for building wealth with the powerful tool through real estate. But it's essential if you're a novice to the ins and outs of the process to learn the various strict requirements before you engage. It is a necessity to work with those who are qualified professionals to make sure that the rules are met and the exchange is a match with your particular tax situation.
Pro: The primary advantage for using this method is the ability that you have to defer tax liability at the point of 'sale'. Choosing to exchange as opposed to selling means that you are able to avoid paying capital gains taxes at the point of transaction. In doing that, investors have the opportunity to expand their wealth much quicker as the proceeds can then go into buying a more valuable piece of property.
Pro: At the time of your death, any deferred taxes that you owe to the IRS are automatically erased. Investors will commonly engage in using multiple exchanges to purchase a number of more valuable properties within their lifetime which creates a tax-free wealth. At the time of their passing, the claim is that their heirs then receive the property at a 'stepped-up' level which touts to be equal to the fair market value at the time of death with no capital gains due. For advice on things you should be aware of before exchanging go to https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx.
Pro: 1031 exchanges are limitless as far as how many you can have and the frequency in which you can engage in them.
While the advantages are plentiful for using the technique, there are strict guidelines that come with it as well. Investors need to be aware of the rules and follow them carefully.
Rule: The vast majority of these are considered to be delayed exchanges where the requirement is that a qualified intermediary has to handle all the paperwork for the deal and hold proceeds throughout the exchange period. In order to qualify for the tax deferral, investors can't take possession of the proceeds.
Rule: Timeframes must be adhered to closely when participating in this process as follows:
- You are given 45 days for which to locate as many as three properties to purchase.
- One of the three properties needs to be acquired within 180 days.
- The time periods are concurrent meaning if it takes you 20 days to find a replacement property, you will then have 160 days for the close. Click to learn what the process is about.
Rule: The proceeds will be returned to you if your most recent transaction fails but you've had a succession of positive results. The capital gains on that negative result plus potentially all of those deferred on the previous exchanges will become due.
Rule: After an exchange is complete, there is no access to the cash from the proceeds.
Rule: The IRS will consider your debt decrease as income inclusive of the associated tax liability if your liability happens to go down due to the transaction.
There are many benefits to using the 1031 Exchange but it's imperative that you use a service that knows the strict guidelines and assists you in following all those rules to the letter to avoid any negative repercussions.
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