The Basics of the 1031 Exchange Rule.
If there is one thing you should not ignore as a property owner is the section 1031 of the IRC. 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. Nevertheless, this section 1031 has further instructions on the conditions and terms which have to be fulfilled before someone is exempt from paying the taxes.Even if investing in property might be something you do for fun, the IRS sees it as a business. You can only exchange properties under the section 1031 if you are dealing with properties which are used for investment purposes or conducting business operations. Thus, people who own residential homes are exempt from this exchange. Those who own vacation homes are in luck because those kinds of properties can be exchanged and you will not have to pay a single cent in taxes. Nevertheless, this is only allowed for people who rent out their vacation homes.
Nonetheless, you cannot just say the vacation home is a rental for the sake of the exchange. You should have hard proof that there have been people renting the property for more than half a year. You will be in luck if it is clear that the duration has actually been longer than that. The downside is that there is a waiting duration of a year or more before you are allowed to move to the new property.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. Note that this kind of exchange is only allowed for properties which go for the same value which is why you will have some difficulties finding someone to swap with. This also covers for cases where you have identified what you want but the other person has not agreed to an immediate swap. You can wait for the exchange but you have to give someone else the money for the property for safekeeping until the exchange happens.
It does not mean you will not have to pay taxes in this kind of an arrangement but the section gives you great benefits. In this case, the taxes you have to pay will be deferred to a later date and that can be forever. You need to know what changes have been made to the section 1031 tax code before you decide to run with it and this site has more details on that. You have to ensure the other property equal value or even greater value than what you hold.