More and more people are finding it tougher to keep a hold of their money these days. It is troubling to see that some people lose some of their money needlessly as well by not understanding some of the tax laws that can shelter some of their money from being unduly taxed.
The area of real estate is a particular area in which people make mistakes. It is possible to shelter money from being taxed if it is taken from the sale of one property and then reinvested into another like property. This is called a 1031 exchange, but it is important to know what qualifies for this and what does not.
In order to do a tax shelter that is referred to as a 1031 exchange, you must be reinvesting the money from the sell of property into like property. For example, if you sell rental property then you must reinvest it into other rental property.
There are also some other requirement s that the transaction from one property to the other be completed in a certain time frame. For example, the replacement property must be identified within 45 days of the sale of the relinquished property. Also, the sale must be completed within 180 days.
In order to do a 1031 exchange and have it qualify you must use a 3rd party who has been qualified to process a 1031. They are primarily used to hold the proceeds from the sale until you reinvest it into the new property. The government has made this rule to protect against from 1031 fraud.
While the idea is not to have a gain it can happen at times. This can happen for several reasons. One of the reasons that this can happen is when you downgrade in your property. When a gain occurs it is called a boot. The problem with receiving a boot is that you then need to pay taxes on that. Be sure you know where you stand and any possible things that you can do to prevent that from happening if you wish to defer all of the taxes from the sale of the property.
A boot, to more clearly define it, can come in many different ways. For example, it can come when the cost of the new investment is less than the sale of the old property. The extra cash then taken out is called a boot.
The time limitation of finding a replacement property in the 45 days following the close of the old property is the most difficult part of the process for most people. This is one area that the IRS will not budge either, so don?t even think that you can ask for and get an extension. It is recommended to try to have some things in place before selling your original property to reduce the risk of not getting the 1031 exchange done properly.
If you have never learned about a 1031 exchange or 1031 exchange property, but you buy and sell property, then you had better learn a little more so that you can stop spending money on unnecessary taxes.