1031 Exchange – What like-kind properties really mean

If you have a family business, then you probably might have heard people talking about the 1031 section. Investors, title companies and realtors use it, so why not trying to find more about it. The 1031 exchange implies the swap of an investment asset or business for another one. The majority of swaps are considered sales and they are taxable, but if you manage to come within 1031 then you will have to pay no tax, and you will improve the effectiveness of your company. You may have heard that special rules apply to this swap, so you have to make you that you follow them in order to not pay any tax. The majority of people who work in the real estate investing industry, and want to use the 1031 exchange are confused by the like-king property term. The rule states that the inter-changeable assets have to be of the same type but not of the same quality.

Like-kind property is a broad term

You will find the like-kind term enigmatic, because you do not know if you can swap your property with the one you intend. Well, you should know that it does not mean what people usually think. For example, you can exchange an apartment for a ranch and a strip mall for a raw land. The rule is extremely liberal, and it offers you the possibility to even swap a business for another.

What properties qualify for the exchange?

Both the replacement property and the relinquished property have to meet certain requirements to qualify for the swap. Both properties have to be used for investment purposes, and if you want to swap one used for personal use, then you may not be able to do it. They have to be included in the same class and be of the same nature. The grade or quality do not matter, because the majority of real estates are like-kind, to other real estates. But you should know that a real estate property from the United States is not like-kind with one that is localized outside of the United States.

What properties are excluded from the 1031 section?

You should make sure that you do not try to swap your property in case it is included on the following list, or you choose one of them as a replacement property. The section excludes stock or inventory in trade, notes bonds or stocks, certificates of trust, partnership interests or debt and other securities.

Cash is taxed

If you want to avoid paying taxes, then you should not receive money for the relinquished property. You may have cash left when you find a replacement property, but you should not use them in personal purposes. Actually, you should get in touch with an intermediary, who would pay you at the end of the 180 days, and the sum will be taxed. It is advisable to choose a replacement property of the same sum with the one you want to sell, or more expensive, if you do not want to pay taxes, and always use an intermediary, because you do not have to come in the possession of the cash.