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1031 Exchange: A Brief Explanation

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 What is a 1031 Exchange and how can you benefit from it? It is essential that you understand what this is because you can use this as part of your strategy to earn more money. This method is similar to the selling of real estate, and then purchasing different real estate to replace the old. However, instead of the two separate transactions, this transaction will be considered as an exchange. The major difference is that selling investment real estate is taxed, whereas an exchange may not be. You will need to adhere to the IRS requirements set forth for the transaction in order for the transaction to be recognized as an exchange. If these guidelines are not met, then you will be looking at a taxable event.
 
 More on the exchange can be found under Section 31 of the Internal Revenue Code. One of the main benefits is that the real estate sold may not be charged with a capital gains tax if the rules are followed, and with the approximate tax range being 20% to 30% that can can be additional money back into your pocket. Of course the tax rate varies according to your tax bracket.
 
 As mentioned earlier, you will need to follow the requirements out to the letter. Again, there will be taxable consequences if you fail to oblige. One of the first things you need to remember is the value of the real estate you are going to buy should be equal to or more than the value of real estate you have sold. In addition to that, you need to use the entire proceeds of the sale to purchase the replacement property.
 
 If any of the said requirements above are not followed, you will have a taxable event. For instance, the value of the property you have purchased is less than the value of the property you have sold. Then the difference between the two values is considered "boot", and will be taxable. This then falls under the partial exchange guidelines. The individual executing the exchange may then apply for a partial tax deferral treatment.
 
 The real estate involved in the exchange should also qualify. First, the relinquished and replacement property should be of like-kind in category. It is recommended that the proceeds of the sale should be handled by a Qualified Intermediary (QI), and that the QI be used throughout the transaction, or the exchange may not be recognized.
 
 You must also follow a timeline. The executing individual should identify the replacement property and needs to take possession of it in a specific time frame. First, the replacement property should be identified within 45 days after the relinquished property is sold. The number of days should be adhered to even if the last day happens to be a holiday.
 
 There is also an Exchange Period. This is the time when the replacement real estate is expected to be transferred to the executing individual. This should be within 180 days after the transfer of the sold property. It can also be on the due date of the tax return that includes the exchange, whichever comes first. As above, the 180 days should be followed even if the last day falls on a non-working day, or on a holiday.
 
 By being familiar with a 1031 exchange you can possibly save money on your next transaction.
 
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