Regardless of being big tax nerds, not many people are able to master all the sections of the tax code. Well yeah, you might know your details about the Sections on Internal Revenue Code, but you probably don’t know much other than this.
Regardless of the lack of interest previously shown towards it, Section 1031 is slowly and gradually finding its way into the small talks made by title companies, average homeowners, and realtors alike.
Before we go building our talk towards how the Section 1031 brings different people together, we will get to define it. Naturally speaking, not many people happen to know about this Section, which is why this definition will help you get the information you need on the subject matter.
In simple words, Section 1031 relates to the swap of real estate with one another. While most of the property swaps that we see happening around us are taxable, Section 1031 acts as an exemption. If your real estate exchange meets the requirements that are highlighted in this section, you would have to pay only a limited amount or no tax at all during the exchange.
Section 1031, as beneficial as it may be, has certain complications that might not be understood by the average consumer. These complications require the need for a professional to break it down to you in simple words. Here’s a basic insight into this section and what it means for everyone. You can learn more about the topic before heading for a proper exchange of your own.
Section 1031 Isn’t for Personal Use
The provisions under Section 1031 apply only to business or investment properties. So, as much as you would want to, you cannot swap your documented, primary residence with another home while remaining under the provisions of this Section.
While you can use 1031 for swapping your vacation homes, the loopholes within the Section have narrowed down. However, you can consult a professional and decide upon your future course of action here.
Personal Properties Don’t Apply
Before the law was updated, quite a few exchanges of personal assets and properties qualified for a 1031. These instances included that of aircraft and equipment and franchise licenses among many others.
However, because of the latest legislation in this regard, only real estate assets for business and investment purposes qualify.
A Special Transition Rule
The TCJA provisions are authentic and thorough in this regard, as a special transitional rule may apply on a 1031 exchange. It is believed that the TCJA allows for the broad application of Section 1031 on a personal property, if the original property was sold and the replacement property was acquired by the end of 2017.
This transitional rule is believed to be specific for taxpayers, and has no space for a reversal of the 1031. Taxpayers cannot use the 1031 rule on an exchange where their new property has been purchased, before the sale of the old property.
Don’t Fall for ‘Like-Kind’ Definition
The Section states that most properties should be of a ‘like-kind’. But, the description here is extremely broad and makes for multiple relaxations in the exchange process. While you might misinterpret this phrase to be of a strict nature, these enigmatic words don’t mean what you might think of them.
The exchange process can be extremely broad, as you can go ahead and exchange raw land with an apartment building, or a strip mall with a ranch in the country. The rules here are extremely liberal, and are present for making the process simpler and easier to follow. You can even exchange one business for another one, while lying within the broad definitions present within this section.
Go for a Delayed Exchange
Traditionally, an exchange would mean the swap of two properties with one another, and this exchange could happen between two separate businesses, individuals, or entities. However, the chances of making the perfect swap are often too slim. The probabilities of you finding the exact same property you want and someone willing to buy the exact same property you are selling are a bit too low.
Considering the slim chances of making the perfect swap, you have the opportunity of a delayed swap available here. In such delayed exchanges, you would require the services of an intermediary or a middleman to hold the cash income from the property you have sold, and then use it when you are buying the exchange property after a while. The middleman should be qualified by law and should have the requisite experience and knowledge to get the transaction done in a manner that befits its importance. Regardless of the delay involved within it, this three-party exchange can be treated as a swap by the Section.
Knowing Delayed Exchange Rules
While delayed exchanges add a lot of feasibility to Section 1031, you still need to know the few rules that govern such a transaction.
As a beginner, you should know the timing rule required for designating your exchange property. Once you sell off your property, the cash received from it would go towards the intermediary that you have selected. You do not have the right to receive the cash, because if you do so, the 1031 agreement will be spoiled. The rule here is that once you have received the cash, you need to designate your replacement property within 45 days. You can designate the replacement property through a written note to the intermediary that specifies details of the property you are acquiring, and everything else that you need to know about it. The IRS believes that you have the right to designate 3 properties to the middleman, as long as you close one of them within 45 days.
The second rule mentions that you should close your deal within 180 days or 6 months of receiving the cash. This means that you have 135 days after submitting your replacement property to close the deal.
The types of exchanges covered under Section 1031 are quite comprehensive, but hopefully, this article has helped you gain some further information and insight into the topic.
Add Comment