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A Few Things that You Should Know Regarding the 1031 Exchange Some of the investors out there have been wise to the tax benefits of the 1031 exchanges for many years. Those are just new to this surely wonder and they wish to know more about this. They would hear the realtors, the investors, attorneys and others say this but they are not quite clear on what the process actually involves. Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under normal circumstance, the sale of the assets would incur tax liability on the capital gains. But, when you are able to meet the requirements that you can find in the section 1031 of such IRS tax code, you can then defer the capital gains tax. However, it is quite important to take note that such 1031 exchange is actually not a tax avoidance scheme. If you are going to sell a business or such investment asset and you don’t exchange this with another property, then you will have to settle the capital gains taxes. There are so many nuances to the 1031 exchange and this is the reason why it is really wise to seek some help from such professional experienced with the transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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You must know that this is not for personal use. Though you would get tempted to think of trading your residence and avoid dealing with the capital gains, such 1031 is jus available for the property that is held for the business or the investment use.
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You must also be aware of the exceptions to the personal use prohibition. Just similar to most things in the IRS code, you should keep in mind that there are exceptions to the rule. Personal residences will not qualify, you may also exchange the personal property such as a piece of artwork or the tenancy-in-common. You must also keep in mind that such exchanged property should be “like-kind”. This is one area that those new investors find confusing. Such term like-kind doesn’t mean exactly the same but this would mean that the exchanged property must be similar in scope and use. The IRS rules may be liberal but there are several pitfalls for those who are not quite careful. You should also keep in mind that the exchanges don’t happen at the same time. One really important benefit is that you can sell the current property and have around six months to close the acquisition of such like-kind replacement property. This known as delayed exchange. You must get the help of such qualified intermediary when you like to complete the exchange.