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A Few Things that You Should Know Regarding the 1031 Exchange There are those investors who are quite wise to their tax benefits from the 1031 exchanges for several years. There are also people who are only new to the game and they actually wonder what all the fuss is about. They would hear realtors, investors, attorneys and others mention such but they are certainly not very clear on what the process actually includes. Well, to simply put it, the 1031 exchange would let an investor swap a business or investment asset for another one. Under such normal circumstances, the sale of such assets would actually incur tax liability on any capital gains. However, if you meet the requirements found in section 1031 of the IRS tax code, then you can actually defer the capital gains tax. However, it is quite important to take note that such 1031 exchange is actually not a tax avoidance scheme. If you are going to sell the business or the investment asset and you don’t replace this with another property, then such capital gains taxes will be due. There are so many nuances to the 1031 exchange and this is the reason why it is really wise to seek some help from such professional experienced with the transactions. Still you are also curious regarding the basics, here are the things that you must be aware of before you try the 1031 yourself.
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Keep in mind that such is not for personal use. Though it can be tempting to consider trading up the primary residence and also avoiding capital gains liability, the 1031 is just available for property held for business or the such investment use.
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There are also some exceptions to the personal use prohibition. Just like most things in the IRS code, there are also exceptions to the rule. Know that personal residences don’t actually qualify, you may a successfully exchange such personal property like tenancy-in-common or that piece of artwork. You have to remember too that the exchanged property must be like-kind. This is an area which would sometimes confuse those new investors. Such term like-kind doesn’t mean exactly the same but this would mean that the exchanged property must be similar in scope and use. The IRS rules may be liberal but there are several pitfalls for those who are not quite careful. Remember that such exchanges don’t take place simultaneously. One of the important benefits is that you may sell the present property and have up to 6 months to close the acquisition of the like-kind replacement property. Such is termed as delayed exchange. If you like to complete this exchange, then you need the help of such qualified intermediary.