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What You Should Know About 1031 Exchange

It is a requirement that you pay capital gains tax when you sell a non-inventory asset at a profit. It is, however, possible to defer capital gains tax payments as long as you make sure to meet certain requirements. For instance, you will need to pay tax on the disposal of property if there was a profit somewhere. The exemption, in this case, takes place if the proceeds from the sale are utilized or invested in another property. This swap effectively acts as your shield against the taxation. Discussed next are some of the other conditions that you must satisfy to defer the payment of capital gains tax.

It is a must that you hold the new property so as to qualify for the exemption from capital gains tax. If you later sell the property, you will be liable to pay capital gains tax. The good thing is the ability to carry out as many exchanges as you deem fit because you will effectively defer the payment of the tax in perpetuity.

The exchange applies to investment and business property, which effectively excludes residential property. So, swapping your home will not work since you will be liable to pay capital gains tax to the authorities. The exchange of vacation homes is different in this respect, but there is a very narrow loophole, making it not worth the trouble for many people.

It is not easy to get someone who wants the property you intend to swap in exchange for the exact kind you wish to acquire, making a delayed exchange a possibility. For the delay to be effective, a middleman is needed to hold your funds, after which he purchases the property you wish to buy in your place. An effective swap is still considered to have taken place notwithstanding the involvement of the third party.

You are required to identify the “replacement property” for the swap to be effective. Here, the identification must be in a document you write, sign, and hand to a qualified intermediary within a 45-day period.

It is only when you meet the like-kind requirement that the exchange will be deemed to be valid. Here, you have to acquire an asset of the same type for this rule to apply, meaning that you can defer capital gains taxes if you sell raw land and acquire a shopping complex.

It is advisable to seek help from qualified experts if you want your exchange to succeed. Mistakes are very likely due to the complexities inherent in tax laws. Besides, tax laws change from time to time. An estate agent, attorney, accountant, and tax specialist can help you navigate the complexities involved.

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