Smart buying and smart selling is a simple phrase which says all about real estate especially if understood in consonance with the 1031 tax deferred exchange. Sounds complicated is it? Well let me put it very simply for you. 1031 tax deferred exchange is a handy tool which if handled elegantly based upon the right professional guidance, can add on to your investment revenues. How and how much are the questions, which depend entirely upon how carefully you deploy this tool while planning for your present and future outlays.
Profitable bargains, deferred capital gain taxes, disguised free loans and equity conservation are just few of the benefits to highlight in transactions including 1031 tax deferred exchanges. By now, you must be curious enough to understand this magic in simple terms. Well in layman terms, 1031 tax deferred exchange simply implies that you treat your sale as exchange, which mandates that the proceeds from the sale of the mentioned property or properties are used for further investment in another property or properties. In effect you carry on your usual business of investing while at the same time are not supposed to pay any taxes until of course you decide to carry the proceeds of the sale back home.
Your partner to the exchange
Facilitator or intermediary would be your partner in the entire deal. He is the one who manages your transactions and ensures that the exchanges are undertaken within the legal preview. The proceeds from the sale of a property meant for exchange are deposited with the facilitator until the prospective properties for investment are acquired. The other important tasks overlooked by this partner would be clear as you further assimilate the details of 1031 tax deferred exchange.
The deadlines
You might be wondering as to what is the catch here? Is it illegal? Well no, not if you are playing in the legal domain. This tax deferral opportunity is completely legal and real. All you need to pay attention is that while realizing such deals or rather exchanges, the important deadlines are paid due attention.
There are two crucial counts, first deadline finishes at 45 days subsequent to selling off the property meant for exchange. Within these 45 days a list of at least three potential replacement properties must be submitted with the intermediary. The other count ends at 180 days form the sale of the property. By the end of this time frame you must acquire the replacement properties i.e. the exchange should be complete. Incompetence in this regard could end up cancellation of the entire exchange in itself.
Exchange restrictions
The 1031 tax deferred exchange does not allows you to include you personal property among other properties as an item in the bouquet for exchange or as an individual property to be exchanged. Only the properties that fall under the category of trade, business or investment related objectives can be transacted under the icon of exchange. Properties under construction can also be included but the stage of the project must be such that the equity should be used up in whatever construction has been completed.
Another important restriction is that the 1031 tax deferred exchange does not give you the permission to use the money from sale for any other purpose save investment in properties. The exchange typically includes all you agents and / or associates in the same brackets and therefore imparts them the same treatment.
Make sure that you have all the intentions derivable from the exchange in writing. A written intent with the intermediary is also a must.
Professional guidance – A must
1031 tax deferred exchange is a wonderful tool when it comes to investment in real estate however even slight negligence or ignorance can assure that you not only are devoid of the benefits but also are disallowed any exchanges. The IRS is very clear about the required norms and it is best to have all the requisite information in writing. The partner i.e. the facilitator must be appropriately selected. You are investing your hard earned money so spare a little more and make sure that you investing it correctly. Take professional help, there are experts in the field who can assist you with all the requisite documentation and can help through any other related predicaments.
Apart from the make sure to abide by the important timelines i.e. the 45 days and 180 days limit to avoid any mishaps during the exchanges. Remember IRS has complete authority to cancel all your exchanges in case of any violations.