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The 1031 Exchange Of Property

In the real estate investment sector, the 1031 exchange technique is often employed. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. 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 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 down leg property is the property an investor disposes using the 1031 exchange. 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. 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. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.

There are times in real estate where property is stolen or burnt and therefore lost. This means that the investor would have to replace the lost investment with a replacement property. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. 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.

As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.

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