If you are planning to do your first 1031 exchange or you are an adept exchanger looking for a company of a more experienced qualified intermediary to partner with, fidelity processing is well equipped to help you accomplish your business and financial goals.
There are different ways to do the 1031 exchange depending upon the needs and availability of the exchangeable properties. The process involved for the 1031 exchange is quite straightforward, but many rules are complicated and filled with risk.
1031 exchange got its individuality under section 1031 of IRC (Internal Revenue Code). It is an exchange in which the investor can reinvest the proceeds from the sale of the relinquished property to buy two or more replacement properties. One of the important points that the investor must keep in mind is that the properties involved in the 1031 exchange must be used for productive trade or business use, or investment property. Many specialist companies in southern California have a team of experts to help you do your 1031 exchange.
What is the 1031 ‘Like-Kind’ Exchange?
Thanks to section 1031 of IRC, now real estate investors can enjoy the benefits of the deferment of taxes. 1031 Exchange allows interchanging the like-kind properties and defers the capital gain taxes. In the like-kind properties, the term like-kind can be understood as the two or more properties of the same nature. In a ‘like-kind exchange, an investor does not receive any profit directly from the sale; only he can reinvest proceeds of the relinquished property with the replacement property.
Requirements for doing a ‘like-kind exchange:
The requirements that need to be fulfilled to qualify for a like-kind exchange are:
- The relinquished and the replacement property must be held for productive use in business or investment.
- An investor must involve a Qualified Intermediary for carrying out a ‘like-kind exchange. A Qualified Intermediary will hold the proceeds obtained from the relinquished property sale and will reinvest it in buying the replacement property. The entire exchange will be invalid if the investor receives the cash after selling the relinquished property.
- Both relinquished, and replacement property must be of the same nature. For example, a private residence can’t be exchanged for a shopping complex.
- The proceeds obtained from the relinquished property sale must be reinvested in purchasing one or more like-kind replacement properties within 180 days. Few restrictions have been imposed on the number of properties that can be identified as replacement properties. However, the investors have the luxury of buying more than one replacement property as long as they satisfy one of the following rules:
- The Three-Property Rule: Under the Three-Property rule, the taxpayer can identify up to three replacement properties. It is not necessary to purchase all the identified properties. The point to be kept in mind is that the value of the replacement property must be equal to that of the relinquished property.
- The 200% Rule: An investor can buy any number of replacement properties as long as the Fair Market Value (FMV) of all the replacement properties doesn’t exceed 200% of the net Fair Market Value of all the relinquished properties.
- The 95% Rule: Under this Rule, an investor is allowed to buy any number of replacement properties as long as the Fair Market Value of the property. The amount received at the end of the exchange must be 95% of the Fair Market Value of all the identified replacement properties.
Now that you’ve become familiar with the requirements of a 1031 Exchange, you must be eager to find out ‘how to do a 1031 Exchange’. For doing so, many companies in southern California can help you out in completing the exchange.