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Property Exchange Under 1031

In the real estate investment sector, the 1031 exchange technique is often employed. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. To do so, there are conditions put in place to ensure that the procedure is properly followed.

Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. The law also states that the closing escrow of the newly acquired property should be in less than six months. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. There is no limitation of the process as it can go on and on to other properties in the future if the investor intends not to incur tax costs at all. The property that the investor sells under the 1031 exchange is called the down leg property. In the same way, the property that is obtained with the proceeds is called the up leg property.

1031 exchange is highly practiced by real estate investors as it makes them retain a lot of the proceed. This means that the investors who practice it will always be assured of passive income. This is the income generated without having to struggle to create the means of its obtainment. This is so because the new investment is not acquired anew but just transferred from the down leg property to the up leg without needing a lot of money to do so. The investor, therefore, will always be in possession of passive income property under the 1031 exchange.

There are instances in which one loses their property in real estate to fires and thieves. Therefore the investor has to obtain a replacement property for the lost investment. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. It comes at an immense cost to the investor as most times replacement properties are more costly than the initial down leg property. Usually, such investors would opt to evade the extra cost of tax so they have to go to the 1031 property investment exchange and transfer the possession from the initial investment to the new property following the protocol under the conditions they are facing.

1031 exchange relatively is more preferred than the oriental way of performing real estate transactions for how beneficial it is to investors practicing it.

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