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What You Need to Know Before a 1031 Exchange There are many tax laws that apply to different areas and section 1031 is one of the most popular provisions. Realtors, investors and title companies recognize this law because it accrues them certain benefits. The honest truth is that 1031 is very crucial in promoting investments in the country. 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. Here are some few things you should know before a 1031 exchange. The 1031 provision is used to swap investment assets and thus little or no application for personal use. Individuals cannot use the 1031 exchange to exchange their homes with other people. That said, it is possible to exchange personal property as long as certain conditions are met. With the services of a tax expert, you will be able to make a quick legal swap. The the general rule is that the assets being swapped must be of like-kind. The term like kind is enigmatic in the sense that a building and raw land could be considered like-kind as long as they meet the criteria set out in the law. The 1031 exchange allows for people to do a delayed exchange. This is where one sells their asset and uses a middle man to hold the cash after the sale. The cash is then used to buy a replacement property that meets your needs. 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. The designation of the required property is also a requirement under the law. You can also designate as many properties as you wish as long as they meet the criteria set out under law.
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It is also important to know that all 1031 exchanges must be done within six months. This means that you must only make the exchange when you have everything in order. Also remember that in the case of a delayed exchange, any cash that remains after the replacement property is bought must be taxed. 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.Practical and Helpful Tips: Finances