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Jun 18

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1031 Property Exchange

The 1031 exchange is a technique used in the real estate investment sector. This technique involves a legal evasion of huge amounts of net taxes the investors of property in real estate often face. There is a protocol in which the technique is carried out in the proper way.

After an investor sells a given property and intends not to incur the tax costs, they have to reinvest the proceeds of the sold property in another new property within forty-five days. The law also states that the closing escrow of the newly acquired property should be in less than six months. The new property that is bought is supposed to be of like kind as the disposed one. The term like kind property implies that the property is used in investment and business purposes only. 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 initial investment property sold in the 1031 technique 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 type of income does not require an investor to make a way financially so as to get the property that will generate income. The investor simply ceases to own the down leg property and starts to own the up leg property without the need of extra funds to purchase the latter. A property obtained in the 1031 exchange which the investor owns will at all be a passive income property.

There are instances in which one loses their property in real estate to fires and thieves. This means that the investor would have to replace the lost investment with a replacement property. In this way, the Party in the occupation of the investment is repaid, and the investor has an investment as well. This process clearly costs the investor because replacing is sometimes more expensive than the acquisition of the 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.

As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.

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