Property Exchange Under 1031
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. For this to be successful, there are rules that accompany this process in order.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. According to the law, the closing escrow of the new investment property is one hundred and eighty days. The new property that is bought is supposed to be of like kind as the disposed one. The like kind characteristic means that the investment property should serve the function of business and investment 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 down leg property is the property an investor disposes using the 1031 exchange. 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. As a result of this, passive income on the investments is at all times assured to the investors. This is the income generated without having to struggle to create the means of its obtainment. 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. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
There are times in real estate where property is stolen or burnt and therefore lost. 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. 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.
Compared to the normal way of investing in real estate, use of the 1031 exchange in investing property technique is very profitable to the involved investor.