The IRS has a tax code referred to as the 10 31 exchange which gives investors and businesses the ability to reduce the amount of tax required to pay after selling the properties. It is also identified as the Section 1031 Exchange. It is important for you to comprehend how the 1031 exchange is applied. What happens is that a business can sell a property then use the capital to invest in the purchase of a similar property. This explains why it is identified as the exchange of like-kind property of equal or greater value. One thing you need to know about that and that exchange is that it is carried out according to the rule of law. The identification of the replacement property is supposed to be within 45 days of the payment of the property that has just been sold. After identifying the replacement property, you will have 180 days to purchase it according to the law. The application of this tax code is done in the 8 step process. You will need a professional to help you through this process but the following details will help you to get accustomed to it.
The first step of this process is for you as the owner of the investment property to make the sale. There should be a third party or middle man who will be receiving the money from the sale on behalf of the owner. The third step in this process occurs after the money is received and it will include the identification replacement property within forty-five days. After identifying the property, you are required to send a duty letter to the intermediary so as to invoke the tender to an exchange. The next step is negotiations with the sale of the replacement property that you would like to use in the exchange. The seller shall be paid by the middleman using the capital gains after the negotiations yield a suitable price for both parties. Filling out the IRS Form 8824 is the last step in this process.
It is recommended to use the 1031 exchange because it will enable you to reduce the amount of money you pay is tax from the capital gains of selling your property. You’ll also avoid paying tax on the amount of depreciation that is claimed on the property. Find out more about this topic here.