1031 Property Exchange
When investing in real estate, the 1031 exchange technique is at times put in practice. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. To do so, there are conditions put in place to ensure that the procedure is properly followed.
The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. A maximum period of six months is issued as the probation period of closing escrow. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. 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 down leg property is the property an investor disposes using the 1031 exchange. Likewise the property being acquired in the technique is the up leg property.
1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. As a result of this, passive income on the investments is at all times assured to the investors. This type of income does not require an investor to make a way financially so as to get the property that will generate income. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. This calls for the investor to put in place a replacement property to the lost property. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. It comes at an immense cost to the investor as most times replacement properties are more costly than the initial down leg 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.
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