Important 1031 Exchange Rules
Topics: 1031, 1031 exchanges, 1031 tax deferred exchange, 1031 exchange properties, 1031 exchange rules
Everyone knows if they have completed a like kind exchange that there are a lot of 1031 exchange rules that you must go by in the process. As with all tax-deferred methods it is absolutely essential that every rule is followed that the IRS requires to make sure that you get the most out of your new investment and save the most in taxes. The following is a list of a few of the most important rules when doing your 1031 exchange.
First the most important thing is to make sure that the assets from the sale of your current property is held in escrow away from your personal assets. This is the reason why it’s important to find a certified public accountant or some other advisor to guide you through the exchange. If at any time the assets from the sale of your business property are combined with your personal funds, then the IRS will disqualify your tax-deferred exchange and require you to pay the money that you were trying to save.
The next starker exchange rules you want to keep in mind have to do with the 45/180 time rule. These are the two amounts of time that are most important in terms of completing your exchange transaction. If you do not meet both of these time frames then again your exchange will be disqualified from the tax-free status and you will have to pay any taxes that would normally have been due to the government.
The 45 day rule requires you to identify a new investment property within 45 days of the close of your previous property. Now this doesn’t mean that you have to pick the exact property you plan on purchasing with the funds that are in escrow. It simply means that you need to identify a property that has the potential of being your new purchase. It does not hurt to identify more than one property to give you the best chance of making a purchase in case one of them is sold to another person. And again keep in mind that the property you identify is not one that you must purchase.
The 180 day rule does require you to have completed your new real estate purchase within 180 days of the close of your previous property. This means you have a roughly 6 months from the sale of your past business property before need to take ownership of the new commercial real estate. This is not that much time to make sure that you do all of the proper due diligence on the new investment. So make sure that you are trying very hard to locate a few different potential investments and begin the closing process as quickly as possible. If it takes longer to close on your new investment than 180 days you will be liable for all of the taxes that you were trying to defer and will have to pay the full boot to the IRS.
As you can see there are many 1031 exchange rules, but with careful planning you can complete your tax-deferred exchange without a hitch.
James helps people understand how to save taxes by following the 1031 exchange rules. You can read more of his work by visiting capitalexchangegroup.com.
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