The 1031 Exchange Of Property
When investing in real estate, the 1031 exchange technique is at times put in practice. When using the technique, the investor defers to pay the required taxes on the sold property in a legal manner. To do so, there are conditions put in place to ensure that the procedure is properly followed.
The proceeds from the sold property are to be invested in another property of the investor’s choice within a period of forty-five days so that no tax is charged on the amount. A maximum period of six months is issued as the probation period of closing escrow. The other property acquired should be of like kind as the initial property. The term like kind property implies that the property is used in investment and business purposes 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. This is the income generated without having to struggle to create the means of its obtainment. 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.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. 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 process clearly costs the investor because replacing is sometimes more expensive than the acquisition of the property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.
1031 exchange relatively is more preferred than the oriental way of performing real estate transactions for how beneficial it is to investors practicing it.