What You Should Know About 1031 Exchange
The tax laws in place require you to pay capital gains tax whenever you sell a non-inventory asset and make a gain from the transaction. With the exemptions in place, however, you can defer capital gains tax payments if you satisfy certain conditions. The disposal of property, for instance, attracts capital gains tax as long as a profit was involved. The exemption, in this case, takes place if the proceeds from the sale are utilized or invested in another property. This simple exchange makes it possible to defer the payment of tax. Here is a look at some of the other conditions you must meet to limit your capital gains tax liability.
The new or replacement property must be held so as to take advantage of the exemption. If you later sell the property, you will be liable to pay capital gains tax. Such an arrangement allows you to defer the payment of tax for an indefinite period since the swaps can be carried out for an unlimited number of times.
Since the exchange involves business and investment property, you cannot benefit from an exemption if you intend to swap a residential building. You cannot, therefore, swap residential property in the hope of deferring the payment of capital gains tax. The exchange of vacation homes is different in this respect, but there is a very narrow loophole, making it not worth the trouble for many people.
You are allowed to do a delayed exchange since it is difficult to find someone with the property you desire and who wants the type you have to swap. The delay involved here requires a middleman who holds the funds you receive from the sale and uses these amounts to buy the property you desire on your behalf. This involvement of a third party is still considered a swap for taxation purposes.
A valid swap is one that involves the identification of the “replacement property”. It involves making the identification in writing, signing the document, and handing it over to a qualified intermediary before a 45-day period lapses.
An exchange is only valid if it involves properties of the same kind or type. Here, you have to acquire an asset of the same type for this rule to apply, meaning that you can defer capital gains taxes if you sell raw land and acquire a shopping complex.
Overall; you should consider the involvement of experts to conduct these types of exchanges. Mistakes are very likely due to the complexities inherent in tax laws. The fact that tax rules keep changing makes it essential to seek help. Tax specialists, accountants, attorneys, and real estate agents are some of the persons who can offer the help required.