1031 Property Exchange
In the real estate investment sector, the 1031 exchange technique is often employed. When using the technique, the investor defers to pay the required taxes on the sold property in a legal manner. To do so, there are conditions put in place to ensure that the procedure is properly followed.
After an investor sells a given property and intends not to incur the tax costs, they have to reinvest the proceeds of the sold property in another new property within forty-five days. According to the law, the closing escrow of the new investment property is one hundred and eighty days. The other property acquired should be of like kind as the initial property. This means that their functions are of business and investment nature so as to be termed as like kind. For an investor who wishes to defer tax payments all through their investments, it is possible as the procedure can be repeated for as long as they wish to following the necessary rules. The initial investment property sold in the 1031 technique is called the down leg property. In the same way, the property that is obtained with the proceeds is called the up leg property.
Operating using the 1031 exchange in real estate is common because real estate investments result in investors saving a lot that would otherwise be paid as tax. This means that the investors who practice it will always be assured of passive income. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating 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. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
There are instances in which one loses their property in real estate to fires and thieves. This calls for the investor to put in place a replacement property to the lost property. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial 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.