401K isn’t the only number you’ll need to understand to grow your money. If you invest in properties, art, or business, learning about 1031 exchanges or like-kind exchanges can save you hundreds of thousands of dollars in tax payments.
Taking advantage of the 1031 exchange is a complex matter. It is not as simple as moving to Nevada to avoid high income taxes; you will definitely need the services of companies that specialize in 1031 exchanges. 1031 Exchange Place shares some information to help you get started.
1. It Allows You to Reinvest without Paying Taxes
1031 exchanges can be used on most “physical” investments. Corporate stocks and partnership interests don’t belong to the purview of 1031. Though 1031s are primarily used on business and investment properties, you can also use 1031 exchanges on art collections, precious metals (silver, gold, etc.), jewelry, and even classic cars. A 1031 exchange allows you to avoid paying taxes upon selling your investment as long as you reinvest the same amount of money you receive from the sale to a different investment.
2. You can use 1031 exchanges on your own houses
If you own multiple residential properties, 1031 exchange companies can find ways to designate such properties as investments; though it may take longer periods. Summer homes and vacation homes are especially popular choices for 1031s, though you may need to put a little more effort into the process.
3. You have 6 Months to “Reinvest”
The moment you sell your investment (property or otherwise) through a designated 1031 exchange company, you have 45 days to designate a replacement for your investment. If you sell a business or investment property, you will need to inform your intermediary of the property you want to acquire. You will need to close the deal in 6 months, so provide your intermediary with a list of several properties that can be viable exchanges.
The 45 days and 6 months of allocated time run concurrently. The faster you designate the alternative property, the more time you get to close the deal. Failure to meet both deadlines will make your sale taxable.
4. Multiple Properties for One is Allowed
The 1031 allows you to sell a single property investment and replace it with multiple properties. This is different from merely designating potential properties. 1031 exchanges enable you to acquire multiple properties from the sale of your single property. An $800,000 business or investment property can be sold and the proceeds can be reinvested into four properties that are worth $200,000 each, or they can have different costs as long as they all amount to $800,000.
5. Once you Receive Cash, It’s Taxable
If you think you’re able enough to perform a 1031 exchange on your own, think again. Once you receive cash, you are required to pay taxes. You will need to hire a 1031 exchange company to serve as an intermediary and to make the process as smooth as possible.
1031 exchanges are great options in reinvesting property and other important investments. Little mistakes in the details can cost you hundreds of thousands of dollars, so it’s best to find reputable 1031 exchange companies to help protect your investments.