Overview Of 1031 Like Kind Exchange
The premise and laws regarding 1031 like kind exchange can be found in the 1031 section of the Internal Revenue Service book. This 1031 like kind exchange is named after the section and description of the law. The 1031 indicates the section and like kind exchange indicates the description of the law. The 1031 like kind exchange law has many points to it that must be followed to avoid problems with the IRS and other legal problems. An outline of these laws can be found below.
The first and most important thing to realize about the 1031 like kind exchange is that is a way to exchange property while deferring the tax that one would incur on the property that is sold to obtain new property. This means that there can be no profit made from selling the old property since all of the funds must go to purchasing a new property. It is also very important to remember that the taxes were not waived; they were simply deferred until a later date allowing for more of the funds to be put towards a down payment or pay off a new property, such as the sales date of the property after the exchange.
The next thing that one must fully understand to partake in a 1031 like kind exchange is what the definition of like kind is legally. This means that the property, though not of the same value, are of the same type. This is to mean that a home cannot be purchased with the proceeds from cattle in order for it to qualify for a 1031 like kind exchange. This does mean that land can be exchanged for land, that homes and buildings can be exchanged for land or buildings, that a ship can match a ship and a plane to a plane. Cattle can only be matched to cattle of the same gender.
Once one knows the type and cost of property he or she is looking for, one must understand the laws of timing a 1031 like kind exchange. These laws state that the purchase of replacement property must be within 45 days of the sale of the initial property unless an extension is filed with a list of properties one is looking at. Once this extension is filed, only the properties on that list will qualify for a 1031 exchange. The taxpayer only has 180 days to locate and purchase a property or series of properties in order for the 1031 exchange to occur. It should be noted that property in this usage is not limited to real estate, but also covers vehicular, manufacturing, and cattle property.
To fully understand and guarantee the success of the 1031 like kind exchange, one should invest in a good qualified intermediary. This intermediary can and will handle the money from the initial sale, handle the 1031 exchange form, and hand the money over to the seller of the replacement property. The intermediary can also further explain all of the 1031 exchange laws.
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