The 1031 Exchange Rules

There is a very easy way to sell property under the 1031 exchange rules. Simply put, this involves selling property with a strategy.  You must have two qualified pieces of property in order for the 1031 exchange rule to work – one to sell and one to buy.  This is also known as a tax deferred exchange.  Many people get this rule confused with 1035 exchange rules.  The 1035 is concerning annuities.  The 1031 is concerning property.  Both involve exchanging one for another.  Both allow you to defer taxes.  Both need to be handled within a designated period of time.

The IRS 1031 exchange rules, if followed carefully, will mean that you do not pay the 20 – 30% in capital gains.  In other words, if you sell your property, the IRS will expect you to give them a percentage of your profits.  However, if you sell the property and turnaround to buy another, you will not need to pay the IRS.  As long as you follow the rules for the time period involved, you will technically the following 1031 tax exchange rules.

Some property owners lose their property due to it being condemned, a fire, or other damage.  If this is the case, there is a tax code called the 1033 exchange rules.  This rule helps you to avoid paying the IRS a large sum of money on a property that you are no longer making a profit from.  This is extremely helpful if you were expecting to follow rules for 1031 exchange.  This is also helpful if a government entity seizes a property.  For example, they seize property in exchange for money in order to build a public road.  This way, you may not follow your plan for the 1031 property exchange rules and save a significant amount of money, but you can’t still follow through with your plan to defer 20% – 30% of your property tax.

The rules of 1031 exchange must be followed very carefully in order to protect your tax status.  The sale of the property must be handled through an agent that is determined to be a qualified intermediary.  All of the money you make from the first sale must be applied toward the second sale.  If any cash is left over, it will be taxed.  In other words, the second property must be more expensive than the first property.  So you may want to take a look at the different types of mortgages available if you need some extra money for a more expensive property.  The main points that you must know in order to follow the 1031 exchanges rules is to understand the identification period and the exchange period.  As long as you follow the rules, you are on your way to saving a significant amount of money with the IRS.

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