Property Exchange Under 1031
When investing in real estate, the 1031 exchange technique is at times put in practice. When using the technique, the investor defers to pay the required taxes on the sold property in a legal manner. There is a protocol in which the technique is carried out in the proper way.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. The law also states that the closing escrow of the newly acquired property should be in less than six months. The other property acquired should be of like kind as the initial property. The like kind characteristic means that the investment property should serve the function of business and investment only. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The initial investment property sold in the 1031 technique is called the down leg property. Likewise the property being acquired in the technique is the up leg property.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. This makes the investors under this scope to be sure of getting passive income from the investment. This is the income generated without having to struggle to create the means of its obtainment. The investor simply ceases to own the down leg property and starts to own the up leg property without the need of extra funds to purchase the latter. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.
There are times in real estate where property is stolen or burnt and therefore lost. This means that the investor would have to replace the lost investment with a replacement property. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.