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Property Exchange Under 1031

The 1031 exchange is a technique used in the real estate investment sector. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. For this to be successful, there are rules that accompany this process in order.

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. A maximum period of six months is issued as the probation period of closing escrow. The other property acquired should be of like kind as the initial property. This means that their functions are of business and investment nature so as to be termed as like kind. For an investor who wishes to defer tax payments all through their investments, it is possible as the procedure can be repeated for as long as they wish to following the necessary rules. The initial investment property sold in the 1031 technique is called the down leg property. In the same way, the property that is obtained with the proceeds is called the up leg property.

Operating using the 1031 exchange in real estate is common because real estate investments result in investors saving a lot that would otherwise be paid as tax. As a result of this, passive income on the investments is at all times assured to the investors. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.

There are instances in which one loses their property in real estate to fires and thieves. 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. 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. There are times that the affected investor would intent to defer the taxes associated so they would have to use the 1031 exchange and transfer the investment from the lost property to the new one in the constraints of the technique.

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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