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In this tough economy people are looking to save as much money as possible, but it is not always that easy. Some people make it even tougher on themselves by their own ignorance of tax laws and a stubbornness to do it themselves. In this case, there is often more taxes paid than is necessary
The area of real estate is a particular area in which people make mistakes. It is possible to shelter money from being taxed if it is taken from the sale of one property and then reinvested into another like property. This is called a 1031 exchange, but it is important to know what qualifies for this and what does not.
A 1031 tax exchange is the reinvestment of the money gained from the sale of one property to another like property for the same intention. For example, if you wanted to get out of one rental property into another, you could do that and avoid taxes because you really have not gained anything yet.
There are also some other requirement s that the transaction from one property to the other be completed in a certain time frame. For example, the replacement property must be identified within 45 days of the sale of the relinquished property. Also, the sale must be completed within 180 days.
In addition to the time requirements, it is also required that the person attempting to do a 1031 exchange obtain a qualified intermediary and use them to hold onto the funds from the sale of the original property. This is done to ensure the interest of the government that no money is gained from the sale under the tax shelter.
While the idea is not to have a gain it can happen at times. This can happen for several reasons. One of the reasons that this can happen is when you downgrade in your property. When a gain occurs it is called a boot. The problem with receiving a boot is that you then need to pay taxes on that. Be sure you know where you stand and any possible things that you can do to prevent that from happening if you wish to defer all of the taxes from the sale of the property.
A boot, to more clearly define it, can come in many different ways. For example, it can come when the cost of the new investment is less than the sale of the old property. The extra cash then taken out is called a boot.
One of the more difficult pieces of a 1031 exchange is finding the replacement property within the first 45 days following the sale of the other property. The IRS is strict on this one and will not file extensions on this, so it is a good idea to have a head start on that one before beginning the process.
If you have never learned about a 1031 exchange or 1031 exchange property, but you buy and sell property, then you had better learn a little more so that you can stop spending money on capital gains taxes.
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