Property Exchange Under 1031
In the real estate investment sector, the 1031 exchange technique is often employed. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. There is a protocol in which the technique is carried out in the proper way.
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 two properties: the purchased and the sold are to be of like kind. The term like kind property implies that the property is used in investment and business purposes only. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The initial investment property sold in the 1031 technique is called the down leg property. Likewise the property being acquired in the technique is the up leg property.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. This makes the investors under this scope to be sure of getting passive income from the investment. This type of income does not require an investor to make a way financially so as to get the property that will generate income. The investor simply ceases to own the down leg property and starts to own the up leg property without the need of extra funds to purchase the latter. The investor, therefore, will always be in possession of passive income property under the 1031 exchange.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. 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 process clearly costs the investor because replacing is sometimes more expensive than the acquisition of the property. There are times that the affected investor would intent to defer the taxes associated so they would have to use the 1031 exchange and transfer the investment from the lost property to the new one in the constraints of the technique.
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.
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