Following The 1031 Exchange Requirements
There are several 1031 exchange requirements that one must be aware of to avoid taxation by the IRS or any type of audit done by the IRS. These 1031 property exchange requirements are made easy with the aid of trained 1031 exchange specialist and the proper 1031 exchange qualified intermediary. By following these strict 1031 property exchange requirements, a lot of money can be saved and the best properties available can be obtained.
The most important of the 1031 exchange requirements is the one at the heart of the 1031 exchange law. This is that there can be no profit gained by the selling of the initial property. This is to mean that the entire amount from the selling of the relinquished property must be used in the obtaining of the replacement property. Any gain in profit from the initial sale qualifies as taxable income and must be reported to the IRS to avoid audits and tax fines.
The second of the1031 exchange requirements regards the exchange itself. This requirement states that the properties must be of like kind. This is to mean that the property must be of the same type, but not necessarily the same value. An example of like kind would be a leased home for apartment buildings, or a molding press for a different molding press, or a parcel of forestland for a parcel of beach land. An example of an un-like kind trade would be cattle for a boat, land for an apartment building, and a truck for a machine. All of these like kind exchanges can be of different value. It is not uncommon to see the exchanges go for a more expensive piece, rather than one of the same value. Multiple pieces can also be combined to create one viable piece.
The third most important of the 1031 exchange requirements is the time limitation one has. It is required that the 1031 exchange takes no longer than 45 days unless an extension is filed with a short list of the properties of interest and then the max length of the exchange is 180 days from the closing of the initial property. During these longer exchange periods, the IRS law 1031 exchange laws state that a qualified intermediary is required to hold the profits from the initial sale. This is because if the seller were to hold the money, it would be considered a profit and subject to taxation.
These 1031 exchange requirements can be easy to follow if one enters the process prepared and with the assistance of a knowledgeable 1031 specialist. If one wishes to undertake the process alone, it would be advisable to take a class and learn more about the 1031 exchange requirements that he or she would be dealing with. There is no point in failing on one of the 1031 exchange requirements and finding one's self in deep trouble with the IRS. If the IRS believes that the purpose of engaging in the 1031 exchange requirements process was completely avoiding taxation, sever audits and fines could be implemented.
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