The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also identified as the Section 1031 Exchange. The application of the 1031 exchange is the first thing you need to understand before proceeding. So as to reduce the tax, the investor or business will sell the property then use the capital gains in the investment of a similar property. It is referred to as the exchange of like-kind property and this is the reason for it. There is a law that governs the implementation of the 1031 exchange. What happens is that after selling the property, the investor or business person needs to identify the replacement property within 45 days of getting the money received from the sale. After identifying the replacement property, the law proceeds to state that you will have a span of 180 days to close the deal of purchasing this property. There are 8 predefined steps you will need to go through when conducting a 1031 exchange. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.
The first step of this process is for you as the owner of the investment property to make the sale. The money that shall be received as capital gains from the sale of investment property shall be received by a qualified intermediary in the second step. Within 45 days of this money being received, a replacement property will need to be identified and this is the third step. To begin the 1031 exchange, you will need to send a duty letter to the middleman. You will also need to hold negotiations with the party that is selling the property that was identified to be used in the exchange. After an agreement is reached on the amount of money to be paid, the middleman shall forward the capital gains to the title company. The last step in this process is to fill out the IRS Form 8824 so as to complete the process.
It is recommended to use the 1031 exchange because it will enable you to reduce the amount of money you pay is tax from the capital gains of selling your property. Another benefit of using 1031 exchange is at it enables you to save from paying up to 25{b13f3c820f9493c5a3b00cef02795f568271ca2661810cb5bbfa9378faacbfbf} on the depreciation of your property in the transaction. Read more here.