Understanding the 1031 Exchange Rule.
Section 1031 is a tax code element a lot of property owners do not yet know about despite how important it is to them. Anyone who plans to sell his or her property in the future at a higher value should see how this tax code can help in that cause so that he or she does not have to give a big chunk of the revenue to the government through taxes. Nevertheless, this section 1031 has further instructions on the conditions and terms which have to be fulfilled before someone is exempt from paying the taxes. You should not think that just because you bought a certain property because you loved something about it there will be no taxes to be paid because this is as good as any other business according to the IRS. Note that you are only allowed to exchange properties under this section if both of the assets are meant for use in conducting business or if the sole purpose is for exchange. Thus, people who own residential homes are exempt from this exchange. Those who own vacation homes are in luck because those kinds of properties can be exchanged and you will not have to pay a single cent in taxes.However, this applies if it also doubles as a rental.
Nonetheless, you cannot just say the vacation home is a rental for the sake of the exchange. You need supporting proof showing that the house has been used as a rental for more than 6 months in one year. You will be in luck if it is clear that the duration has actually been longer than that. Additionally, the move to the next house will not be immediate but rather after one year. Since you cannot decide to swap and expect to find someone with a property you are interested in immediately, you are allowed some time to find another investor. Note that this kind of exchange is only allowed for properties which go for the same value which is why you will have some difficulties finding someone to swap with. There are cases where you will find the right property but the current owner might need some time before they agree to swap.In such a situation, the cash from the sale of the house will be held by a third party until the exchange takes place.
It does not mean you will not have to pay taxes in this kind of an arrangement but the section gives you great benefits. You will have deferred your taxes and you can continue doing that for your whole life. The key is being up-to-date with the 1031 exchange rule and if you do not know the current regulations and rules, here is an update. You will only be allowed to do this if the property you are selling is equal in value with the other one or if the value is much more valuable than what you previously had.