More and more people are finding it tougher to keep a hold of their money these days. It is troubling to see that some people lose some of their money needlessly as well by not understanding some of the tax laws that can shelter some of their money from being unduly taxed.
One of the biggest areas of trouble is in real estate, or real property. There are laws that allow people to shelter their money from being taxed if their intent is to reinvest the money gained from one sale of property into another like kind property. This exchange of property is called a 1031 exchange. While it can be very helpful, it must be done right in order to qualify and keep your money sheltered.
The definition of a 1031 tax exchange is to reinvest the proceeds from one sale into another property that is like kind or that will be used for business purposes. One example of this would be that you reinvest money from the sale of one rental property into another rental property.
Another key aspect of a 1031 exchange that must be complied with is the time frame. If you want to do a 1031 exchange transaction, then you must identify the 1031 exchange property within 45 days from the close on the original property. Also, you will need to close the purchase of the new property within 180 days.
In order to do a 1031 exchange and have it qualify you must use a 3rd party who has been qualified to process a 1031. They are primarily used to hold the proceeds from the sale until you reinvest it into the new property. The government has made this rule to protect against from 1031 fraud.
However, it is possible for a person to have a gain and still complete a 1031 exchange. It is not advised most of the time, but it can be done. The gain in this case is often referred to as a boot. The boot must be reported and taxes paid on it.
A boot, as it is called in the real estate business, can come about even when you did not intend it to. Sometimes, you sale a property and then in the reinvestment you get a better price on the replacement property and you end up paying less than what you sold the last one for. When that happens, you have a gain. You can also have this happen if the debt is simply reduced on the property that you are about to purchase.
One of the more difficult pieces of a 1031 exchange is finding the replacement property within the first 45 days following the sale of the other property. The IRS is strict on this one and will not file extensions on this, so it is a good idea to have a head start on that one before beginning the process.
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