Everyone is able to benefit from tax-deferral strategies, such as the 1031 exchange. Section 1031 of the Internal Revenue Code allows you to delay paying the compulsory contribution to state revenue if the proceedings are reinvested in a akin property as part of a Starker exchange. Basically, you can trade one income investment property for another. You have approximately 180 days to purchase a new real property. How do you know if the replacement property is actually like-kind? Like-kind is a vague term. In this article, we’re going to take a closer look at the problem.
All 1031 exchanges depend on like-kind property. But what is like-kind property, anyway? As maintained by the Internal Revenue Service, like-kind designates any kind of possession of the same nature, character or class. The grade or quality of the properties doesn’t bear a great importance. Like-kind properties are held for investment purposes. You can’t swap property that is movable in a 1031 exchange. The law doesn’t allow it. You can transfer assets only in interest of real estate. If your property is determined as personal, it will never ever be deemed like-kind.
According to the exchange regulations, you need to pinpoint the replacement property, hire a qualified intermediary, and exchange it for an asset of similar value. When it comes to 1031 exchange real property, you can substitute a condominium for a duplex. Why? Because they are part of the same asset class. The courts have the tendency to interpret the meaning of the term like-kind in a broad manner. Therefore, you can exchange a rural estate for a city estate or an improved building for an unimproved building. The quality may differ, but the nature and the character are the same.
What if the replacement property is larger in value? It’s still possible to defer the recognition of gain. All you have to do is re-invest all of your equity into a property of matching worth. You should think about borrowing money. This isn’t considered income because you’re obligated to pay the loan. If you’re not interested in reinvesting all of your equity, then you should seek professional advice. The most important thing to keep in mind is that every situation is unique and that there is nothing simple when it comes to initiating the exchange.
So, you sell real estate property and complete a like-kind exchange. In case you didn’t know, there aren’t any restrictions concerning the number of replacement properties. Find 3 estates of any value and make sure that they don’t go beyond 200 percent of the value of the relinquished property. If the transaction is completed properly, then you don’t have to worry about income tax. Attention needs to be paid to the fact that profit or loss will be acknowledged in case that the real estate property is disposed of within 2 years. You must hold onto the possession for a significant amount of time before making any kind of transaction.