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How to Properly Use 1031 Exchanges It is becoming more and more common for people who don’t work on taxes to talk about 1031 exchanges. They can also be called a like-kind exchange or a Starker. Trading one business or type of investment for another one is the simple definition of a 1031 exchange. Doing it this way means that you will have no tax or only a small portion of the tax that you would have to pay if you did it as a normal sale. You don’t have to pay the taxes, because you never had the money for your investment. This isn’t a capital gain, so the IRS doesn’t make it taxable. You will save money on the taxes, so this will help your investment to grow faster. There are no limitations for how many times or how often you can do a 1031 exchange. You can trade your investments as much as you want. Each swap that you make, may give you a profit, but you can avoid the taxes until you cash out. When you do decide to cash out, you will only have to pay the tax on the final investment, not all of the other ones that led up to it. There are some things that you should know if this sounds appealing to you. You can’t use it for personal real estate. This rule only applies for investments and business property. If you make sure to understand all of the loop holes, you may be able to do it for vacation homes. Personal investments like a painting may qualify for this kind of a trade.
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You aren’t limited very much by the term like-kind. You may fall into a trap if you don’t know the rules, but for the most part, you can exchange real estate for most other kinds of real estate. Trades with businesses is the same way. They can sometimes be delayed exchanges, and that is where the term Starker exchange comes in. Since you may not be able to find someone with what you want who wants what you have, you can trade to a third-party who will then get what you want when it comes on the market. It is still considered a trade because you are never in contact with the money.
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In a delayed exchange, there are some rules you have to follow to avoid the taxes. When you sell your property, you can never come in contact with the cash. The third-party you hire is the only one that can hold on to it. Within 45 days of your property’s sale, you also have to designate a replacement property. The third-party who is holding your money has to have in writing what you want them to use it for. If you are okay with a couple different kinds of purchases, then you can designate up to three kinds of property that they can buy for you.