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.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. A maximum period of six months is issued as the probation period of closing escrow. The new property that is bought is supposed to be of like kind as the disposed one. The like kind characteristic means that the investment property should serve the function of business and investment only. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. 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. This makes the investors under this scope to be sure of getting passive income from the investment. This type of income does not require an investor to make a way financially so as to get the property that will generate income. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
There are times in real estate where property is stolen or burnt and therefore lost. This means that the investor would have to replace the lost investment with a replacement 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. Sometimes the investor would wish to defer the taxes associated with the replacement property and therefore, they would need to do the 1031 replacement exchange where they would transfer the ownership of the lost down leg property to the acquired up leg property under the technique’s conditions.
As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.