The Basics of the 1031 Exchange Rule.
Everyone who owns a property has to understand section 1031 in the IRS codes. For those who want to resell the properties they have at a profit, it is crucial to have this section in mind. However, this does come with terms and conditions and when you understand them the rest will not be that difficult. It doesn’t matter why you are buying properties or selling them because even if it is a hobby to do the revenue authority will see it as a business. Note that you are only allowed to exchange properties under this section if both of the assets are meant for use in conducting business or if the sole purpose is for exchange. This automatically disqualifies people who are interested in getting rid of their residential homes. Even though you are not allowed to exchange your residential home, in case you have a vacation home you can do so. This applies to people who draw income from their vacation properties by renting them out when they are not in use.
Nonetheless, you cannot just say the vacation home is a rental for the sake of the exchange. You have to show concrete proof that it has been rented out for at least 6 months in a year. If you can show that the occupancy was for longer than that it will increase your odds. The downside is that there is a waiting duration of a year or more before you are allowed to move to the new property. Since you cannot decide to swap and expect to find someone with a property you are interested in immediately, you are allowed some time to find another investor. The requirement is that the next property has to be equal in value with what you are disposing of which is why it is not the easiest thing to do. There are cases where you will find the right property but the current owner might need some time before they agree to swap. A delayed exchange is possible in such scenarios but you will not be the one to keep the property cash but rather a third party.
The merit of section 1031 is the benefits it comes with. In this case, the taxes you have to pay will be deferred to a later date and that can be forever.Nonetheless, you have to keep update with the 1031 exchange terms and you can click here for more info. Also, make sure you are buying a property that is of a greater value or equal to what you will be selling.