The four stages any entrepreneur goes through   

The four stages any entrepreneur goes through   

Running a business is not something easy to do and while some people manage to succeed although they do not have a lot of experience, others may fail even if they are More »

Steps to starting a small business

Steps to starting a small business

If you are interested in setting up your own business, then there are a few important steps to follow in the process. Because the business world is highly competitive, it is more More »

Keeping your social media fans engaged – how to attract new followers

Keeping your social media fans engaged – how to attract new followers

Considering that social media marketing is more popular than ever and can have a very important influence on the success of a company, managers will need to always be careful with their More »

 

1031 exchange rules that all investors must follow

The 1031 exchange strategy might come like a great relief for investors, because the moment they resort to it, they can exchange their investment property with another like-kind one and what is most important, they do not have to worry about paying capital gain taxes. However, it is worth mentioning that in order for an investor to benefit from the best results regarding his or her DST properties and the 1031 exchange, it is mandatory to follow these highly important rules mentioned below.

 

Rule #1 – the like-kind property

In order for you to qualify for this 1031 exchange, you have to ensure that the investment property you are interested in selling and the one you want to buy are “like-“kind”. This implies that they must be of the same nature or character, even if they do not have the same quality or grade for instance. To put it simply, you cannot exchange things that are not the same assets, such as farming equipment for a building for instance.

Rule #2 – business or investment properties only

It is important to keep in mind that the 1031 exchange can only be applied for business or investment properties only, which means that personal properties are excluded. This means that you are not allowed to swap your primary residence for another property, whether the latter one is another primary residence, a vacation property or a commercial rental property for instance.

Rule #3 – equal or greater value

The main purpose or resorting to 1031 exchange is to defer paying capital gain taxes that come from selling a property, but in order to completely avoid them, you have to ensure that the equity and the net market value of the investment property you are about to buy is either equal or greater that the property you sell. Otherwise, you will only defer a certain percentage of the tax.

Rule #4 – same tax payer

This rule implies that the tax return and the name that appears on the title of the property that was sold must be the same one as the tax return and the title holder that is supposed to buy the new investment property. However, it is worth mentioning that there can be an exception to this rule, and that is possible in the case of those single member limited liability companies (“smllc”), since they are considered in compliance with the 1031 code. As a result, the smllc is able to sell the investment property and the same member can buy the new property in his name.

Rule #5 – 45 day identification period

The investor has 45 calendar days to find up to three potential investment properties that qualify for like-kind, but most of the times this is quite a challenging task, since these deals still have to be profitable. One exception to this rule is known in specialty terms as the 200% rule, which implies that the properties you have identified, whether they are four or more should not have a value (the four of them combined) that exceeds 200% of the value of the property you sell.