An Overview Of The 1031 Tax Free Exchange Law
1031 tax free exchange has been in the books for as long as the books have been around. This great law allows for people with "useful" property to exchange the property for a like kind property of similar value. This law allows for the businesses or individuals to save a lot of money and gain more property value by not having to pay taxes on the money that they never really get to keep. This is an extremely valuable law to be aware of with very costly consequences if not followed precisely. With the help of professionals called qualified intermediaries, this does not have to be a concern,
1031 tax free exchange is so named for the section of law that the IRS explains this law. That is the section 1031. While this law is not truly tax free, but rather tax deferred, it is possible to never have to pay taxes on the property, making it close to a tax free exchange. The taxes that are spoke of are regarding the selling of the initial property. This sale generates taxable income, but with the 1031 tax free exchange laws, this tax does not have to be paid immediately, but rather can be delayed indefinitely.
The 1031 tax free exchange law names the sales of useful property in particular. This is to mean that residential property, unless it is an apartment building or had a 30 year loan on it, is not considered useful property. There are several types of property that are considered useful. This includes business buildings, parcels of land, apartment buildings, machinery, vessels, and planes. Cars and trucks are not included in the list of the useful properties, but since they are used in the explanation of the useful properties and 1031 tax free exchange, these are also included with the common tax free exchange.
The money gained and property increase due to the 1031 tax free exchange is in regards to the down payment and the land purchased. Though a few thousand does not sound like a lot when purchasing property, this amount can make the difference between a good land property and a great land property. The same holds true for machinery and transportation.
While this law seems very good and beneficial, there are fall backs. This law is governed by very strict time regulations. There is also the need for a qualified intermediary. There are forms that need to be filled out and sent to the appropriate personnel. There is a lot that a business or individual must do in a very short period. If any one of these areas is mishandled, the IRS can decide to stop the 1031 tax free exchange and tax one on the profits of the initial property. Luckily, many companies offer their expertise on the process of the 1031 tax free exchange program and hold the money from the initial sale until the finial property is found and purchased. It is only the qualified intermediary who is allowed to handle any of the money.
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