Everyone who owns a property has to understand section 1031 in the IRS codes. 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.However, there are some things you ought to understand before you start celebrating the facts that the tax has been scrapped off. 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.Therefore, people who have residential homes cannot use them to make a profit through the exchange under section 1031. Even though you are not allowed to exchange your residential home, in case you have a vacation home you can do so. 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 have to show concrete proof that it has been rented out for at least 6 months in a year. You will be in luck if it is clear that the duration has actually been longer than that.Also, there is a catch in that you will have to wait for one year before you can start using the property you swapped with. Another advantage of the section 1031 is that it allows people to have a grace period as they try to find a property to swap with. Remember that you have to find a property of a similar value and that is not the easiest thing. This also covers for cases where you have identified what you want but the other person has not agreed to an immediate swap. A delayed exchange is possible in such scenarios but you will not be the one to keep the property cash but rather a third party.
The merit of section 1031 is the benefits it comes with. The tax payment can be deferred forever. Nonetheless, you have to keep update with the 1031 exchange terms and you can click here for more info. 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.