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How You Can Benefit from the 1031 Exchanges

If you are planning to sell the investment or a business property, then you should know that the capital gains tax on profits which could run from 15 to 30 percent when the state and federal taxes are combined. Because of this, it is a great option that you take the required steps so that you can avoid that big loss. A big deduction for the tax could make you lose the money that you must use for the future investments.

You should know that the 1031 exchanges may permit you to defer taxes. This has been considered as a great wealth-building tool that is offered to taxpayers. This is a huge part of the success tactic of a lot of financial wizards and also the real estate gurus. The name is obtained from the Section 1031 of the IRC and the tax-deferred exchange allows the taxpayer to sell the income, investment or the business property and replace this with a like-kind property.

The capital gains on property which are sold are deferred when you follow the IRS rules. This is one wise tax and also investment strategy and estate planning tool. The investor may continue to defer the capital gains on the investment property until death and such would mean potentially being able to avoid all of them.

Previously, there were no time limits on the exchange. The IRS demanded stricter controls of the process and this lead to the creation of 1984 Section 1031. This particular legislation limited the deferred exchanges which defined the “like-kind” property and also created that timetable to complete the exchange.

The real estate property which has been held for business use or for investment can qualify for the 1031 exchange. You have to know though that the personal residence doesn’t qualify and the fix-and-flip property also does not qualify since this fits in the category of property being held for sale. The vacation homes or second homes aren’t held as rentals and they also don’t qualify for the 1031 treatment but there is a usage test under the Paragraph 280 in the tax code that can apply to these properties. You need to seek the advice of a tax expert for this matter.

The property bought for resale and one that is under development don’t qualify for the tax-deferred treatment as well. Stocks, bonds, notes and inventory property and also the beneficial interest in partnership aren’t like-kind property for exchange purposes.

For you to qualify for the 1031 property exchanges, your transaction should be in the form of an exchange instead of just the sale of one property with a purchase of another. The property that has been sold and the new property for replacement should both be held for investment purposes or for the productive use in business or trade. One good example is a shopping center exchanged for land.