The 1031 exchange allows US taxpayers to sell certain properties and defer capital gains taxes by acquiring another property within a certain period of time. The sold and replacement property must be held for business or investment purposes and of a similar type. Two time-based rules apply, including a 45-day period to identify a replacement property and a 180-day period to receive the new property.
For those interested in a 1031 exchange, also called a similar or deferred type 1031 exchange, this option may seem like a great money saver. Detailed in Section 1031 of the Internal Revenue Code, the 1031 exchange allows United States taxpayers to sell certain properties and avoid paying capital gains taxes on the sale immediately. In fact, they can be deferred almost indefinitely thanks to this rule.
One of the most important 1031 exchange rules is that the taxpayer must acquire another property within a certain period of time for the disposed property to qualify for the capital gains tax deferral. If the taxpayer waits too long, he may lose his chance to fully benefit in this way. Because capital gains taxes can be quite high, many people will benefit significantly from exercising the 1031 exchange option.
When considering the possibility and potential benefit of a 1031 exchange, many people first look at the 1031 exchange rules that govern the type of property that is eligible for the tax-deferred exchange. First, the sold property and the replacement property must be held for business, business, or investment purposes, and stocks and bonds, notes, and inventory do not count. Personal property and real property, as long as it is located in the United States, count as long as it meets the criteria established by the Internal Revenue Code. Even cattle can count under the 1031 exchange rules.
To be eligible for a 1031 exchange, the sold and replacement property must be of a similar type, which basically means similar in nature. For example, a person may trade a vacant lot for an office building or a business-use car for a business-use van. However, the property does not have to be the same in terms of quality.
There are two 1031 exchange rules based on how long a person must comply. The first involves identifying a replacement property for the property that has been sold. The taxpayer cannot take more than 45 days after the sale of the original property to identify a replacement. The 45-day period is not extended for non-business days, including weekends and federal holidays. However, this time period is only to identify the property; The taxpayer has even more time to purchase the replacement property or asset.
The next time-based 1031 rule involves the swap period. A person has 180 days after the sale of his original property to receive the property or asset with which he is replacing it. Alternatively, the taxpayer may receive the new property up to 180 days after the due date of their tax return for the year in which the sale of the relinquished property occurred. The taxpayer must receive the new property for whichever 180-day period after the date of sale or after the tax return due date, whichever is earlier. There are no exceptions for any part of the 180-day period that falls on a holiday or weekend.
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