Understanding the 1031 Exchange Rule.
Section 1031 is a tax code element a lot of property owners do not yet know about despite how important it is to them. If you are hoping to use your properties to get more revenue then this is one of the tax codes which can help you reduce the amount of tax you have to pay. However, there are some things you ought to understand before you start celebrating the facts that the tax has been scrapped off. It doesn’t matter why you are buying properties or selling them because even if it is a hobby to do the revenue authority will see it as a business. You can only exchange properties under the section 1031 if you are dealing with properties which are used for investment purposes or conducting business operations. This automatically disqualifies people who are interested in getting rid of their residential homes. Even though you are not allowed to exchange your residential home, in case you have a vacation home you can do so. This applies to people who draw income from their vacation properties by renting them out when they are not in use.
You will not just except the IRS to take your word for it when you tell them you have been renting out the vacation house. You need supporting proof showing that the house has been used as a rental for more than 6 months in one year. If you can show that the occupancy was for longer than that it will increase your odds. Additionally, the move to the next house will not be immediate but rather after one year. Note that the section also gives you some time so that you can find someone to swap with. The requirement is that the next property has to be equal in value with what you are disposing of which is why it is not the easiest thing to do.Also, you might find a property but the owner might not be ready to swap. In such a situation, the cash from the sale of the house will be held by a third party until the exchange takes place.
The merit of section 1031 is the benefits it comes with. In this case, the taxes you have to pay will be deferred to a later date and that can be forever.Nonetheless, you have to keep update with the 1031 exchange terms and you can click here for more info. You have to ensure the other property equal value or even greater value than what you hold.