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A Brief Guide To The 1031 Exchange

The 1031 exchange is an IRS tax code which enables investors and businesses to reduce the amount of tasks they are required to pay when they sell certain properties. It is also referred to as the Section 1031 exchange. The first thing you need to understand in this process is how the 1031 exchange works. What happens is that a business can sell a property then use the capital to invest in the purchase of a similar property. This explains why it is identified as the exchange of like-kind property of equal or greater value. One thing you need to know about that and that exchange is that it is carried out according to the rule of law. What happens is that after selling the property, the investor or business person needs to identify the replacement property within 45 days of getting the money received from the sale. After identifying the replacement property, the law proceeds to state that you will have a span of 180 days to close the deal of purchasing this property. There are 8 predefined steps you will need to go through when conducting a 1031 exchange. Outlined below are the steps which you should be familiar with despite their complicated nature that requires a professional to help you through.

When applying the 1031 exchange, the first step will be the sale of the investment property by the investor or businessperson. There should be a third party or middle man who will be receiving the money from the sale on behalf of the owner. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. The fourth step of this process will involve you sending a duty letter to the intermediary holding your capital gains, for the 1031 exchange. It is at this point where you will be able to negotiate with the seller of the replacement property. After an agreement is reached on the amount of money to be paid, the middleman shall forward the capital gains to the title company. To complete the process, you need to fill out the IRS Form 8824.

It is recommended to use the 1031 exchange because it will enable you to reduce the amount of money you pay is tax from the capital gains of selling your property. There is the connection of income tax on the amount of depreciation claimed in the property that can go up to a rate of 25% and using the 1031 exchange will save you from incurring this expense. Check out this link to read more.

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