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.
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. According to the law, the closing escrow of the new investment property is one hundred and eighty days. 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. It is possible to use this technique as many times as possible on an investment and in this way, the investor is always assured of not paying required taxes throughout their investments. The initial investment property sold in the 1031 technique is called the down leg property. Likewise the property being acquired in the technique is the up leg property.
1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. This means that the investors who practice it will always be assured of passive income. 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. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
There are times in real estate where property is stolen or burnt and therefore lost. Therefore the investor has to obtain a replacement property for the lost investment. This serves to restore the initial state of investment where the investor has a business and the tenant is compensated. 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. 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.