Everyone who owns a property has to understand section 1031 in the IRS codes.If you are hoping to use your properties to get more revenue then this is one of the tax codes which can help you reduce the amount of tax you have to pay. However, there are some things you ought to understand before you start celebrating the facts that the tax has been scrapped off. It doesn’t matter why you are buying properties or selling them because even if it is a hobby to do the revenue authority will see it as a business. Note that you are only allowed to exchange properties under this section if both of the assets are meant for use in conducting business or if the sole purpose is for exchange. This automatically disqualifies people who are interested in getting rid of their residential homes. However, there is a loophole in this exchange system for people who have vacation homes. Nevertheless, this is only allowed for people who rent out their vacation homes.
Saying that the vacation home has been rented out for a certain amount of time will not just cut it. You need supporting proof showing that the house has been used as a rental for more than 6 months in one year. If you can show that the occupancy was for longer than that it will increase your odds. 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. The requirement is that the next property has to be equal in value with what you are disposing of which is why it is not the easiest thing to do. 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. The key is being up-to-date with the 1031 exchange rule and if you do not know the current regulations and rules, here is an update.Also, make sure you are buying a property that is of a greater value or equal to what you will be selling.