1031 exchanges are also known as Starker exchanges or like-kind exchanges. This is a tax deferral technique used by some of the best real estate investors in the nation. Due to the fact that prices have risen above those of the alleged real estate bubble of the previous ten years, 2022 is a great year to switch homes.
This implies that you can effectively exchange real estate in a pricey market for one or more properties in other developing regions of the country. You can easily achieve this through a successful 1031 exchange without having to pay federal income taxes at the time of the exchange.
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This article covers all to know about 1031 exchanges, including what they are, how they operate, and 5 things you should do to achieve 1031 partial exchanges.
Partial 1031 Exchange
In general, a 1031 exchange involves exchanging one type of investment property for another of comparable or higher worth. The advantage is that investors can postpone paying capital gains taxes on the original property’s sale. It would be a partial 1031 exchange if you kept some of the sales proceeds rather than investing the entire sum.
Achieving 1031 Exchange
Carrying out a partial 1031 exchange is comparable to carrying out a standard 1031 exchange with a few major exceptions. When a 1031 exchange is completed, investors occasionally don’t have a specific new investment property in mind, so the amount of equity is required for the subsequent purchase.
In order to get through the partial 1031 exchange process easily, you need to follow these rules and requirements.
- Business Properties or Investment Only
1031 exchange can only involve properties used for investments or businesses. Personal assets, such as principal residence, are not eligible. The Tax Cuts and Jobs Act of 2017 also made it so that general personal property was no longer eligible for tax deferral under Section 1031.
- Like-Kind Property is a Requirement
The properties being given up and being acquired must be of like type, which means that while they can have different qualities or grades, they must be similar in nature or character. Almost every kind of property can be traded for almost any other kind of property when it comes to real estate.
- Same Taxpayer Name
The name on the purchase documentation for the replacement property must coincide with the name on the tax return and title of the property that was given up. The sole exemption to this regulation is if you sell the surrendered property using a single-member limited liability corporation and buy the replacement property using your own name.
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- Greater or Equal Value Property Only
The replacement property must have a net market worth and equity that are equivalent to or greater than those of the surrendered property in order to receive a 100% federal income tax deferral in exchange.
It should be noted that if no more than three like-kind properties are designated as replacement properties, the value of the replacement properties will not affect whether or not the transaction qualifies for tax-deferred treatment under Section 1031.
- Timeline for 1031 Exchange
A 1031 exchange cannot last longer than 180 days, or roughly six months, on its whole. As we’ve already indicated, you have 45 days to find suitable replacement properties after starting a 1031 exchange, and then 135 days to consummate the purchase of one or more than one of those properties.