The IRS has a tax code referred to as the 10 31 exchange which gives investors and businesses the ability to reduce the amount of tax required to pay after selling the properties. If you haven’t heard about it, then you probably know it by its other name which is Section 1031 exchange. The application of the 1031 exchange is the first thing you need to understand before proceeding. What happens is that a business can sell a property then use the capital to invest in the purchase of a similar property. This explains why it is identified as the exchange of like-kind property of equal or greater value. One thing you need to know about that and that exchange is that it is carried out according to the rule of law. According to the law, after an investor receives money from the property they just sold they will need to identify the property they are going to buy within 45 days. After identifying the replacement property, the law proceeds to state that you will have a span of 180 days to close the deal of purchasing this property. There are 8 predefined steps you will need to go through when conducting a 1031 exchange. You will need a professional to help you through this process but the following details will help you to get accustomed to it.
When applying the 1031 exchange, the first step will be the sale of the investment property by the investor or businessperson. The sale will involve a middleman who is also supposed to receive capital gains from the sale of this property on behalf of the owner. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. To begin the 1031 exchange, you will need to send a duty letter to the middleman. The next step is negotiations with the sale of the replacement property that you would like to use in the exchange. The seller shall be paid by the middleman using the capital gains after the negotiations yield a suitable price for both parties. The last step in this process is to fill out the IRS Form 8824 so as to complete the process.
It is recommended to use the 1031 exchange because it will enable you to reduce the amount of money you pay is tax from the capital gains of selling your property. There is the connection of income tax on the amount of depreciation claimed in the property that can go up to a rate of 25% and using the 1031 exchange will save you from incurring this expense. Read more here.