“In this world”, said the brilliant Benjamin Franklin, “nothing is certain but death and taxes”. While conventional medical practices proceeds to develop a cure for mortality, 1031 exchanges provide you with a valuable mechanism against the foibles of the taxman. Allowing the exchange of one property for another, this property market trend can help you hold on to money that might otherwise end up with the IRS. How can you tell whether you are qualified to reap the benefits of this remarkable property trend?
The primary stipulation tends to be that the two properties involved in the swap be in use for “trade or productive purposes”, that is that they are moneymaking concerns of some kind, along the lines of a rental property or holiday home. The property intended for swapping must also reside in the US, though it can be located at some point within.
1031 exchanges necessitate the participation of what are referred to as Qualified Intermediaries, who deal with the paperwork involved in the switch, and assume a role akin to a property purchaser. The property to be exchanged is handed over to this intermediary, until the property owner locates a new property, at which point the switch can be made.
This sort of property exchange operates under strict guidelines and an exacting schedule. Once the original property is sold, a list of possible replacements must be supplied to the intermediary with forty-five days, while the exchange itself must be completed within one hundred and eighty. The title to both properties is required to remain intact for the duration of the entire process, so this is not the time to dissolve any business partnerships that might be involved. Any deviance from these strictures can threaten the entire exchange process.
The properties to be exchanged must also be what is described as “like-kind”, meaning that they are generally comparable. This does not mean that the two properties must echo one another completely, it simply refers to the fact that the property relinquished and the one to be taken up must both be suitable for use in a similar business or investment related way.
1031 exchanges are not for use on residential homes, and so, for many people, are of little value. But if you own a business property and would like to move premises without losing a sum of money to the taxman, then a 1031 exchange might just be the right choice for you.