1031 Property Exchange
In the real estate investment sector, the 1031 exchange technique is often employed. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. For this to be successful, there are rules that accompany this process in order.
The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. According to the law, the closing escrow of the new investment property is one hundred and eighty days. The two properties: the purchased and the sold are to be of like kind. The like kind characteristic means that the investment property should serve the function of business and investment only. For an investor who wishes to defer tax payments all through their investments, it is possible as the procedure can be repeated for as long as they wish to following the necessary rules. The down leg property is the property an investor disposes using the 1031 exchange. In the same way, the property that is obtained with the proceeds is called the up leg property.
Operating using the 1031 exchange in real estate is common because real estate investments result in investors saving a lot that would otherwise be paid as tax. This makes the investors under this scope to be sure of getting passive income from the investment. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. The investor, therefore, will always be in possession of passive income property under the 1031 exchange.
There are instances in which one loses their property in real estate to fires and thieves. This calls for the investor to put in place a replacement property to the lost property. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.
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