1031 Property Exchange
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. To do so, there are conditions put in place to ensure that the procedure is properly followed.
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. The law also states that the closing escrow of the newly acquired property should be in less than six months. 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. It is possible to use this technique as many times as possible on an investment and in this way, the investor is always assured of not paying required taxes throughout their investments. The property that the investor sells under the 1031 exchange is called the down leg property. In the same way, the property that is obtained with the proceeds is called the up leg property.
1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. As a result of this, passive income on the investments is at all times assured to the investors. 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. The investor, therefore, will always be in possession of passive income property under the 1031 exchange.
There are times in real estate where property is stolen or burnt and therefore lost. Therefore the investor has to obtain a replacement property for the lost investment. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. 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.