Section 1031 of the Internal Revenue Code defers taxes on like-kind exchange of properties, but what exactly qualifies as “like-kind?” By legal definition, “like-kind” means that two properties or assets involved in the exchange are of the same nature. If you don’t want your gains to be subject to capital gains tax, you need to exchange the property for another property. Don’t worry about the quality; as long as they are both properties, you’re good.
Aside from exchange, there’s also another way to benefit from a 1031. If you reinvest the gains in the sale of your property on another property, you also qualify for tax deferral on capital gains. However, it still has to be like-kind, so you can’t reinvest the gains in the sale of your property to a car and vice-versa. In addition, keep in mind that the deferral only lasts for the whole tax year, so you need to keep on reinvesting on like-kind property if you want the deferral to last longer.
Even if the properties are like-kind, Section 1031 only caters to properties and assets for productive use in trade or business. Residential homeowners, however, qualify for a 1031 as long as they turn their home into a business (e.g. rental). With this, properties and assets bought for personal use don’t qualify for a 1031.
When it comes to the real world, buying and owning properties is far harder than a board game might show you. Here are three considerations property owners should always keep in mind.
Reasons for Buying
Buying a property for business is different from personal use. For one thing, personal properties are not likely to give you much income, if any at all. Think twice before buying when you do not have a concrete plan of action to follow, because it’s usually not cheap being a property owner.
Smart Use of Assets
If you’re thinking of buying a business, you should have already thought of many different factors to determine whether or not your idea is a profitable one. Location, for example, affects how many customers you get and how hard it is for you to get supplies. You have to know the basics if you want to make good use of your property.
Things get even more complicated when tax is taken into account. In buying and selling properties, for example, you can actually make a like kind exchange instead, in order to avoid paying certain taxes and to keep your money out at a minimum. Simply put, it’s an advantage to know your tax laws.
Bankruptcy in real life means more than just a bruised ego, and there are definitely no “Get Out of Jail, Free ” cards for you to use, so if you want to be a property owner, it pays to be smart.