The Intricacies of the Section 1031
There are some people who understand all the details about the Internal Revenue Code Sections. For most people though, their knowledge ends with a few details on the 401(k). There is also an increase in the interest shown towards Section 1031 these days. This is because of its application in the real estate world.
1031 comes into play when there is the swapping of one investment property for another. In many of the real estate swaps, tax would be imposed just like in a sale. But in case you make sure it is a 1031 type of exchange, then there will either be no taxes to pay or only a little of it to pay. Here are even more facts about 1031 Exchanges you need to be aware of.
It affects only business and investment properties exchanges, not residential types. If you intend to live in that house, it will not qualify. It can, however, be used for a vacation home. You will need to first stop using it as such. You then have to rent it out for at least 6 months, conducting the lease as a business arrangement. This makes the vacation home an investment property, which now complies with the rules of the Exchanges. It is more complex than the simple description. This is why you need to talk to the experts. You need to be aware that it will not work for personal property swaps. The amendments made to the section saw to this new status. People were using it in all manner of property till then.
If you found the Section 1031 Exchanges to be too much to use, you may turn on the Opportunity Zones. Some people find them to be easier to apply. You check out details about them on this site.
There is also the fact that when they refer to like-kind properties, it does not mean the properties will have to be all the same. You are allowed to exchange varying property. You can for example exchange a piece of land for an apartment building.
You have the option of a delayed exchange. It is common to miss the other exchange property that qualifies for this process the first time you look. You will, therefore, be forced to go for a delayed exchange. There shall be an intermediary who will hold the funds after you release the property, and use the funds to acquire the replacement property for you. It is still seen as a swap, only if you observe these rules. You first must never come into contact with those funds, lest the exchange is nullified. The release of your property will then trigger a 45 day period in which you need to have found the replacement property. It is important that you specify the other property. You can have as many as three of them, as long as you close one within 6 months.