Factors That Can Affect Your 1031 Exchange

LOS ANGELES - Oct. 15, 2019 - PRLog -- The busiest and most populated states like California, Texas, and New York have seen a tremendous rise in the number of 1031 investors in recent years, which in turn, has also increased the demand for 1031 properties at such locations. To successfully qualify for a 1031 exchange, an investor must abide by the rules established by the IRS, and one of those rules suggests that properties involved in 1031 exchanges must be held for use in trade, business or for investment purposes. Investors can't trade their primary residence for an investment property using a 1031 exchange.

How Depreciation Works In 1031 Exchange?

Depreciation is an important concept for understanding the true benefits of a 1031 exchange.

The percentage of the cost of an investment property written off every year by recognizing the impact of wear and tear is called Depreciation. Capital gains taxes are calculated when a property is sold based on the property's net-adjusted basis, which reflects the property's original purchase price, in addition to capital improvements minus Depreciation.

If the property is sold for more than its depreciated value, you may have to recover the depreciation. That implies the amount of depreciation will be included in your taxable income from the sale of the property.

Since the size of the depreciation retrieved increases with time, you might be motivated to engage in a 1031 exchange to dodge the large increase in taxable income that depreciation recover would cause later on. Depreciation recapture will be a factor to represent when computing the value of any 1031 exchange (https://1031xchange.com/) transaction—it is just a matter of degree.

How To Choose A Replacement Property?

Like-kind property is usually defined as per its attributes or nature, and not according to its grade or quality. This shows that there is a broad range of real properties that are exchangeable. The investor or the taxpayer can exchange a Vacant land for a commercial building, for example, or residential property can be exchanged for industrial or vice versa.

However, the investor cannot exchange real estate for artwork because that does not meet the definition of like-kind. Properties involved in 1031 exchanges must be held for use in trade, business, or investment, not resale or personal use. This generally infers a minimum of two years' of ownership.

It's mandatory that the value of the replacement property must be equal to or greater than the value of the relinquished property. The investor must identify a replacement property for the assets sold within 45 days and then finalize the exchange within 180 days.