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Things You Need To Know When It Comes To 1031 Exchanges

Tax experts may be able to tell you what Internal Revenue Code Sections are, but what most people learn will not go beyond 401(k). (Yes, the workplace retirement savings plan that you have has actually been named after a section found on the tax code.)

So the question here is what do they mean by 1031? When you talk about 1031 exchange (also termed as like-kind exchange), it is the swapping of one business asset or investment asset for another. Although you might have known of most swaps being taxable as sales, if the exchange is within 1031, you will either be required to pay limited tax or you may actually have no tax at all at the time of the exchange.

As an effect of this, you are now free to change the form of your investment without worrying yourself on things like recognizing or cashing out a capital gain. This is the way for you to continue the growth of your investment tax deferred. And there is absolutely no limit on how frequently you are allowed to do a 1031.

You also need to understand that there are complications doing a 1031 which is why it will be necessary for you get some help from a professional. If you’re considering doing a 1031, or you’re simply curious about it, here are the things that you should know.

1031 Exchange Is Not For Personal Use

You should know that this is for investment and business property only, which would mean to say that there is no way for you to swap your primary residence with some other home. There may be some other ways for you to use a 1031 in swapping vacation homes, however, doing so could be a lot trickier than it used to be as the loophole may be much narrower.

But some of your personal property may qualify

1031 exchanges deal with real estate most of the time. However, there are also some exchanges that may involve some personal properties (say a painting).

“Like-kind” has a broad sense in meaning

Majority of the exchanges should only be of “like-kind” – whose meaning might not be exactly what you think it means. You can always do an exchange of your ranch for a strip mall, or if you have an apartment building, you can choose to exchange it for raw land. The rules can be that liberal. But again, you should be aware that there are quite a lot of traps set up for those who are not really familiar with it.

You may always choose to have a “delayed” exchange

When it comes to property exchange, it simply involves two people where one swaps his property for the other’s. But the truth is that it could be quite difficult to find another person who has that very property you want to swap for, who also wants the exact property that you currently have.