admin Posted on 8:04 pm

Who should think about using a 1031 exchange?

If you own real estate that will provide a profit on the sale, you should consider whether a 1031 exchange is right for you. There are five different classes of property taxes: property used in the taxpayer’s trade or business, property held for the purpose of sale to customers, property used as a principal residence, property used as a vacation home and property held for investment. .

1031 exchanges apply to property held in a taxpayer’s trade or business as well as property held for investment and, in certain situations, property held as a vacation home. Please note the following stipulations:

• Property held for immediate sale is not considered an investment

• Commercial use can be defined as holding property for productive use in business or commerce

• Property that is removed from a previous “productive use” in the business may qualify

There are many possible benefits of using a 1031 exchange, as long as you are clear on how best to maximize your advantages. Examples of benefits include:

• Own multiple buildings instead of just one

• Gain leverage

• Defer payment of taxes on capital gains

• Relocate to a new area

• Consolidation or improvement of buildings

• Getting relief from property management

The real estate you sell, as well as the real estate you buy, must be put to productive use in a trade or business or for investment purposes, and must be similar. To obtain the tax benefits, the proceeds of the sale must pass through a qualified intermediary and not through your own hands, even briefly. If the funds pass through your hands at any time, any and all cash receipts you earn may be subject to tax.

There are many different types of properties that can be exchanged in this way. “Like type” refers to properties that are similar in character or nature. Examples of popular similar properties may include commercial properties, condominiums, vacant lots, rental houses, duplexes, or apartments. Not-of-a-kind properties are primary residences, notes, partnerships, stocks and bonds, properties to be resold immediately, or developed lots held for sale.

You should never try to handle the funds associated with a 1031 exchange on your own. Doing so can eradicate your capital gains tax deferral and make you pay taxes, eliminating one of the main reasons people seek 1031 exchanges in the first place.

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