Understanding The 1031 Exchange Tax Rules
Understanding the 1031 Exchange Tax rules is necessary to enjoy the full benefits of the tax-deferred concept. It is usually a good idea to get some assistance from a tax expert to help you through the IRS minefield.
The rules concerning 1031 Exchange transactions address the types of properties that can be used and the time limits for the completion of the transaction. It is necessary that the property be one that is used for a business purpose, a source of income, or an investment. In some cases, non-real estate property can be used for a 1031 Exchange, however, the proceeds from the sale of the property must be reinvested in a "like kind" type of investment.
The time limits are the most important part of understand 1031 Tax rules. Once the sale of the initial property is complete, you have exactly 45 days to name the new investment. You have 180 days to actually close the second purchase. The IRS will not allow an extension of this time limit for any reason. Even when the 180 day falls on Christmas or any other holiday, that will not buy even one extra day.
In cases where the transactions are not simultaneous, the taxpayer cannot actually receive the funds that result from the initial sale. They must be paid to a Qualified Intermediary. The Qualified Intermediary must be assigned prior to the completion of the first sale, so that he can receive the funds when the sale is closed.
There are several 1031 Exchange Tax rules that deal with a concept known as "boot". Although boot is not used in the tax codes of the IRS, it is commonly used when discussing the tax implications of 1031 transactions. Boot means value received for other considerations. These can be any number of different ways that value is added onto the transactions such as promissory notes or agreements to perform work on the property after the sale. It is important to be aware of all of the different things that could be considered boot by the IRS as it could result in a tax liability.
Even the simplest matter dealing with the Internal Revenue is going to be complex. 1031 Tax Exchange rules are no exception. It is usually recommended that the first step in the process is retaining a tax professional or a CPA who has a good understanding of what is required and any potential pitfalls. The second step is to be advised by them and to pay close attention to the advice. By: Raynor Article Source: http://www.ArticleDashboard.com Raynor James is with FSBOAmerica.org - get a free one month listing when you sell FSBO homes for sale by owner.
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