Business owners should know about this - 1031 exchanges

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Business owners are usually interested in tax deferment strategies. What does that mean? Well, there are several things you might find both useful and interesting about deferring taxes. There is a type of property exchange, called a 1031 exchange that allows you to swap similar properties while deferring almost all your taxes. Starting with question number one: what `02` exchange properties mean? Well, this type of exchange is also called a like-kind exchange, which will instantly make you think about similar properties. It is defined as a way that allows a person to defer paying the capital gain taxes on a property the moment it gets sold, as long as the other property implied is purchased with the same amount of money obtained from selling the first.

Many people consider 1031 exchange properties a method to defer taxes and nothing more. Yet, the truth is that like-kind exchanges can have many more benefits that you can find extremely useful for your situation. For instance, investing into low-income businesses that require a higher maintenance that you can no longer sustain can be solved by simply swapping that property with one that does not require paying taxes. Other useful benefit of 1031 exchanges would be the fact that you can actually change the location of your business from one place to another, thus avoiding the IRS knocking. Don’t forget about three-party exchanges and get well-informed about what they imply before doing anything else. See below other information about 1031 exchanges that you might find useful:

When you should opt for a like-kind exchange?

Paying capital gain taxes is a problem that many businessmen struggle with. This is the reason why avoiding this is ideal for people who want to invest in a certain field. The great part about 1031 exchanges is that you can fix your mistakes. For example, in the case that you made some investments in the past that you now regret, you can fix that mistake by swapping that property for one that seems more profitable or easier to maintain. A property that’s costing you more than you actually make is not one worth keeping, but you should also consider the fact that it will be quite difficult to find someone interested in such property to close the deal with.

So, after you finally decided that a 1031 exchange is the right option for you, then be prepared for learning about the intricacies of it. There are rules you need to follow, there are things you need to know about swapping properties and conditions to respect. A 1031 exchange implies, as mentioned before, properties of similar value. If the value of your property is much lower than one you desire to obtain, the exchange will not be possible. Real estate investors and businessmen use 1031 exchanges for the many benefits it brings, but they are very well-informed about requirements. Not every property is suitable for swaps.

What types of like-kind exchanges are out there?

There are four different types of like-kind exchanges: the simultaneous exchange, the delayed exchange, the reverse exchange and the improvement one. Each type of exchange usually refers to the way the closure is done. The first case – simultaneous exchange – refers to the moment when both the person who owns a property one desires and the person who would like the previous mentioned person’s property are into the swap. This case is extremely rare, considering the fact that when you want to give a property away you have a certain reason for it and many people will consider that reason a downside. Yet, there are some cases where the respective properties are exactly what the persons want for each other, meaning that the exchange can be done in the very same day. That’s why it is called a simultaneous exchange.

The second type – delayed exchange – appears the moment when both persons are given 180 days to find the property they want to swap with. This is the most common 1031 exchange type and it is usually chosen by real estate investors and businessmen. Compared to the reverse exchange, where you choose and purchase the property you desire on the spot, but you are paying later, the delayed exchange is more beneficial. Why? Because the reverse exchange includes paying cash only and since most banks won’t approve lending your money considering the complicated paperwork, you won’t be able to pay on time. Transferring the property title into your name is more difficult than in the case of another type of like-kind exchange.

In the case of improvement exchanges, you can swap properties with a slightly different value and use the remaining money to improve/rebuild it. This is useful for people who desire to change the field they work in and would like to invest in another type of business.

What the rules are?

First rule is that the properties swapped cannot be personal properties. This is the main reason why 1031 exchanges are suitable for the business sector. Swapping primary residences is not possible. Equal value is a condition mentioned throughout the whole article, so it’s impossible to miss. Another rule that’s important to take into consideration would be the 45-day identification window. As an investor you will get 45 days to identify a certain number of like-kind properties to swap yours with. In this window of time, you will have to discover like-kind properties that respect each condition of a 1031 exchange, including the cash perspective.

This is different from the 180-day purchase window mentioned above. In this period of time after you’ve sold the initial property, you will be able to complete the exchange entirely. You cannot miss this deadline, or the exchange won’t complete. You should know that wisely swapping properties can lead to a tremendous increasing of your cash flow. The one rule you’ll have to follow is carefully choosing the property you want to swap to, because your financial future depends on it. Mistakes at this point are not allowed.