1031 exchange is an exchange that got its existence from section 1031 of the IRC (Internal Revenue Code). When the property investor decides for an investment, he can choose 1031 exchange as an option. Under this, an investor can sell the property, and the proceeds received after selling the replacement property are reinvested to buy a new replacement policy. This deferral policy of 1031 exchange can be used multiple times until the tax liability crosses into the individual’s estate death.
The first and most important step is the involvement of a Qualified Intermediary, without whose presence the investor cannot complete the exchange. The cash received after the sale of the relinquished property is kept in a special type of account known as an Escrow Account. But there is a condition that if the investor touches the cash, they are disqualified from doing the 1031 Exchange.
1031 Exchange allows the exchange of only like-kind properties. In this exchange, the real estate property can only be exchanged with real estate or commercial properties.
Under this 1031 exchange, swapping of a vacation home is done for the like-kind estate exchange. This is one of the best ways to increase an investment property’s value to 1031 into something better, like a vacation rental home. Before selling an income property, one should check whether they qualify for a 1031 exchange or not.
There are multiple options under 1031 exchange to go with:
- The vacation home can also be sold through a 1031 exchange if the home is not rented for more than 14 days every year or it is not used for personal use for more than 14 days per year.
- The vacation home can also be sold through a 1031 exchange. If the home is not rented for more than 14 days per year and the personal use of the home is not more than 14 days per year
- The proceeds received from the 1031 exchange can also be used to buy a retirement home. Suppose if you own a fourplex and want to sell it, then you have to pay the tax for the capital gain on any appreciation and the depreciation recapture. You can also use 1031 exchange to purchase a perfect retirement home.
1031 exchange is the best way to level up your investment by exchanging the income property for a vacation rental home if you are flexible with where to invest your proceeds.
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