Nuts & Bolts of a 1031 Rollover
Who doesn’t like to save money? Here, we’ll tell you how you can save money with a 1031 rollover, or 1031 exchange. You’ll walk away with a basic understanding of a 1031, and maybe a few ideas on how you can use it.
What’s a 1031 Rollover?
Also called a 1031 exchange, a like-kind exchange, and a “Starker”, 1031 is a section of the federal tax code. Section 1 relates to taxable income, section 401 is about pensions, and section 1031 handles gains. The federal tax code, or Internal Revenue Code (IRC), has just under 10,000 sections, so it’s no wonder that filing taxes often
requires professional help.
To use a 1031, you exchange an asset for another asset of similar worth. For example, you can exchange a vacation home for a vacation home, or a commercial property for a commercial property. In the eyes of the Internal Revenue Service (IRS), this exchange of “like for like” isn’t taxable, at least in the near future.
With a 1031 rollover, you rollover tax payments on assets until you sell. And when you’re ready to sell years down the road, you pay one tax ― a long term capital gains tax that varies by tax bracket between 15 – 20%.
As with any section of the Internal Revenue Code, the ins and outs, the restrictions, and the allowances are all complex. An example is exchanging a vacation home for a vacation home. A vacation home is personal property, which means that it sits outside the scope of 1031 rollovers. However, you can easily turn your vacation home into an investment, which would allow you to use it in a 1031 rollover.
To prove that this second home isn’t your primary residence, you must have turned it into an investment ― a rental property ― for a significant period of time, according to Forbes. To be on the safe side, renting your vacation home for a year is recommended.
Bring in the Pros
As we mentioned earlier, these are the basics of a 1031 rollover. To get the most out of a 1031, we highly recommend seeking the assistance of a tax lawyer.
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