1031 Is Not That Basic
Oct 29, 2009 Business Tax
In this tough economy people are looking to save as much money as possible, but it is not always that easy. Some people make it even tougher on themselves by their own ignorance of tax laws and a stubbornness to do it themselves. In this case, there is often more taxes paid than is necessary
One of the biggest areas of trouble is in real estate, or real property. There are laws that allow people to shelter their money from being taxed if their intent is to reinvest the money gained from one sale of property into another like kind property. This exchange of property is called a 1031 exchange. While it can be very helpful, it must be done right in order to qualify and keep your money sheltered.
The definition of a 1031 tax exchange is to reinvest the proceeds from one sale into another property that is like kind or that will be used for business purposes. One example of this would be that you reinvest money from the sale of one rental property into another rental property.
Another key aspect of a 1031 exchange that must be complied with is the time frame. If you want to do a 1031 exchange transaction, then you must identify the 1031 exchange property within 45 days from the close on the original property. Also, you will need to close the purchase of the new property within 180 days.
In order to do a 1031 exchange and have it qualify you must use a 3rd party who has been qualified to process a 1031. They are primarily used to hold the proceeds from the sale until you reinvest it into the new property. The government has made this rule to protect against from 1031 fraud.
However, it is possible for a person to have a gain and still complete a 1031 exchange. It is not advised most of the time, but it can be done. The gain in this case is often referred to as a boot. The boot must be reported and taxes paid on it.
A boot, to more clearly define it, can come in many different ways. For example, it can come when the cost of the new investment is less than the sale of the old property. The extra cash then taken out is called a boot.
One of the hardest and most stressful parts of the 1031 exchange is finding the 1031 exchange property within the limited time frame of 45 days. Once that is done, the stress goes down significantly, but the close on that property needs to happen within 180 days of the closing of the other.
If you have never heard of a 1031 exchange or 1031 exchange property, but you purchase and sell property, then you had better learn some more so that you can stop spending money on capital gains taxes.
Related Articles
Tags: 1031 tax exchange. 1031 exchange property, Business Tax, real estate, tax laws, tax shelter
Leave a Reply