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For those interested in a 1031 exchange, also called a 1031 like-kind or deferred exchange, this option may seem like a huge money-saver. Detailed in Section 1031 of the Internal Revenue Code, the 1031 exchange allows United States taxpayers to sell certain property and avoid paying capital gains taxes on the sale right away. 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 time period in order for the disposed-of property to qualify for the deferment of capital gains taxes. If the taxpayer waits too long, he may lose his opportunity to benefit in this manner altogether. As capital gains taxes can be rather hefty, many people stand to benefit significantly by exercising the 1031 exchange option.
When considering the possibility and potential benefit of a 1031 exchange, many people look first at the 1031 exchange rules that govern the type of property that is eligible for tax-deferred exchanging. First, the property sold and the replacement property must both be held for business, trade, or investment purposes, and stocks and bonds, notes, and inventory do not count. Personal property and real estate, as long as it is located in the United States, does count as long as it meets criteria set by the Internal Revenue Code. Even livestock may count under the 1031 exchange rules.
To be eligible for a 1031 like-kind exchange, the sold and replacement property must be of like-kind, which basically means similar in nature. For example, a person may exchange a vacant lot for an office building or a business-use car for a business-use van. However, the property doesn’t have to be the same in terms of quality.
There are two time-based 1031 exchange rules a person must adhere to. The first one involves identifying a replacement property for the property that has been sold. The taxpayer can take no more than 45 days after selling the original property to identify one for replacing it. The 45-day period is not extended for non-business days, including weekends and federal holidays. However, this time period is only for identifying the property; the taxpayer is allowed even more time to buy the replacement property or asset.
The next time-based 1031 rule involves the exchange period. A person has 180 days following the sale of his original property to receive the property or asset with which he is replacing it. Alternately, the taxpayer may receive the new property up to 180 days after the date his tax return is due for the year in which the sale of the relinquished property occurred. The taxpayer must receive the new property by whichever 180-day period, after the sale date or after the due date of the tax return, is earlier. There are no exceptions made for any part of the 180-day period that falls on a holiday or weekend.
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