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The 1031 Exchange Of Property

The 1031 exchange is a technique used in the real estate investment sector. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. For this to be successful, there are rules that accompany this process in order.

After an investor sells a given property and intends not to incur the tax costs, they have to reinvest the proceeds of the sold property in another new property within forty-five days. The law also states that the closing escrow of the newly acquired property should be in less than six months. The two properties: the purchased and the sold are to be of like kind. The like kind characteristic means that the investment property should serve the function of business and investment only. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The property that the investor sells under the 1031 exchange is called the down leg property. The up leg property is that which is purchased in the 1031 exchange technique.

1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. This makes the investors under this scope to be sure of getting passive income from the investment. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. The investor simply ceases to own the down leg property and starts to own the up leg property without the need of extra funds to purchase the latter. The investor, therefore, will always be in possession of passive income property under the 1031 exchange.

There are instances in which one loses their property in real estate to fires and thieves. This means that the investor would have to replace the lost investment with a replacement property. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. Sometimes the investor would wish to defer the taxes associated with the replacement property and therefore, they would need to do the 1031 replacement exchange where they would transfer the ownership of the lost down leg property to the acquired up leg property under the technique’s conditions.

1031 exchange relatively is more preferred than the oriental way of performing real estate transactions for how beneficial it is to investors practicing it.

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