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A Brief Guide To The 1031 Exchange

The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also identified as the Section 1031 Exchange. It is important for you to comprehend how the 1031 exchange is applied. What happens is that a business can sell a property then use the capital to invest in the purchase of a similar property. This explains why it is identified as the exchange of like-kind property of equal or greater value. There is a law that governs the implementation of the 1031 exchange. The identification of the replacement property is supposed to be within 45 days of the payment of the property that has just been sold. After this point, the next step is to close the deal of buying the property identified as the replacement property, and this is supposed to take place within 180 days. The application of this tax code is done in the 8 step process. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.

When applying the 1031 exchange, the first step will be the sale of the investment property by the investor or businessperson. There should be a third party or middle man who will be receiving the money from the sale on behalf of the owner. Within 45 days of this money being received, a replacement property will need to be identified and this is the third step. After identifying the property, you are required to send a duty letter to the intermediary so as to invoke the tender to an exchange. It is at this point where you will be able to negotiate with the seller of the replacement property. After an agreement is reached on the amount of money to be paid, the middleman shall forward the capital gains to the title company. To complete the process, you need to fill out the IRS Form 8824.

Using the 1031 exchange is a good move because it enables you to save a lot of money that would have been otherwise spent on the payment of taxes. There is the connection of income tax on the amount of depreciation claimed in the property that can go up to a rate of 25% and using the 1031 exchange will save you from incurring this expense. Read more here.