If you want to defer income taxes that are due from the sale of a business or investment property, you should learn more about an IRS 1031 exchange. This way, instead of keeping the profits after the close of escrow, you can purchase another property that is similar to the one you’ve sold. This will allow you to continue running your business from a new location without having to adjust the company budget too drastically. However, you should also be aware that an IRS 1031 exchange is not valid when it comes to the exchanges of stocks, notes, or bonds.
Even though there are several benefits to an IRS 1031 exchange, there are a few risks involved as well. It is very important that you follow all the guidelines that are associated with the deadlines that have to be met with an IRS 1031 exchange. The management of your funds is also crucial during the transaction; if you gain any profit from a property that you are selling during the 1031 exchange, the transaction will no longer be valid. If this happens, you will be liable for paying any taxes on the relinquished property if you are the seller.
It is also necessary for you to hire a qualified intermediary in order to walk you through the IRS 1031 exchange process. This person will need to sign all of the documents that are associated with the sale, and will tell you how to allot the funds that are involved in the exchange of properties. An intermediary can be your attorney, who will let you know the legal implications of the ‘sale’. You can also refer to your CPA in order to learn how an IRS 1031 exchange can benefit you financially. Selecting an intermediary before you start the process is the best way to go, so that you’ll already have somebody working for you once your new property is selected.
You’ll also need to be aware of the different types of 1031 exchanges that may be available to you. The reverse exchange is a process that involves that purchase of a replacement property before the sale of the relinquished property. In a simultaneous exchange, the replaced and relinquished property close escrow at the same time. You may also want to participate in an improvement exchange; this permits that proceeds from the exchanged property to improve the replacement property. The last option is often ideal for business owners that don’t have the funds to make improvements to a new building that may have been purchased to house the company.
If you want to know more about the IRS 1031 exchange, or want to see if you qualify, you can visit www.irs.gov for more details.