How to Use a 1031

What is 1031 and how can you benefit from it? The stated number refers to the Section 1031 of the Revenue Code. It states that once a property owner sells his investment property, he can use the proceeds from the sale to purchase a similar or a like-kind property. In this case, the proceeds from the sale of the first investment property shall not be subjected to capital gains taxes. However, in order to take advantage of this, one has to follow certain rules.

The like-kind property

Among the rules that the homeowner should take note of is that the like-kind property has to be identified within forty-five (45) on the closing transaction of the first property. The like-kind property does not have to be exactly the same with the previous property. In fact, the IRS has provided a very broad meaning and interpretation of it. If you have sold an unimproved land, you do not have to purchase the same property to qualify for this. Just make sure that you purchase another investment property that meets the rule of the 1031 code.

The role of the QI

The entire proceeds of the sale shall be handed over to a qualified intermediary or the QI. This person or party is initially the middleman. The funds that were not surrendered to the QI shall be subjected to taxation. The QI shall have possession of the funds in escrow until such time that the closing of the second property happens. It is also part of the responsibility of the QI to help the property owner with the preparation of all the documents necessary for the purchase to ensure that they will not have problems during the transaction.

Additional conditions of 1031

1031 also rules that the new property bought by the owner should have the same or even greater debt than the first property. Aside from that, the closing for the new property has to take place within 180 days after the closing of the first property has been made.

The use of 1031 Exchange

Many investors use this to manage and juggle investment properties. Since this is simply put as a sale of an investment property for the purchase of another. However, you have to be certain that it follows the 1031 Exchange rules. If you intend to use this, you have to let the other parties, may it be the buyer or the seller, know that you are using the 1031 exchange. They need to be aware of this because you are going to entrust most of the transaction to a QI. Including this in your notification is essential so that the other parties know that they are required by law to cooperate. Once the transaction is completed, it will be filed with the tax return using the form 8824.

You can definitely use the 1031 exchange to your advantage. Familiarize the rules to ensure that everything will go smoothly, if you are in doubt, seek help. Several sites online can provide you answer. Just remember, you have to purchase a like-kind property in exchange of the investment property you sold. Make sure that the property meets the rules set by 1031.

Consider Chandler Homes for your next home. You can also check MLS Real Estate in Chandler for your next purchase.