A tax deferred exchange makes it possible for an owner to sell a piece of investment property and buy a new property using the profits from the sale without having to pay taxes right away. Taxes are not due until the owner decides to sell the new piece of property. The reason for this is that when a property is sold or exchanged to buy a similar piece of property, the new property is seen as part of the initial investment.

These tax deferred exchanges are an opportunity that everyone can benefit from. This can be done by purchasing an investment property and selling it after a year of renting it out. Two more properties can then be purchased from the sale. It is important to keep in mind that the IRS is not specific on how long a property must be held or how often a 1031 exchange can be preformed. As a good rule of thumb a property should be held for at least 1 year so the IRS will view the owner as a long term investor. If practiced too often or if properties are not held for a long enough period of time the IRS may stop allowing for such exchanges to take place. It's essential to hire a lawyer or a company that specialized in 1031 tax exchanges when participating in these types of exchanges. These professionals will guide you and help you with issues that may come up in an exchange such as the time period in which the new property must be bought.

When performing a 1031 tax exchange. The property must be identified by the buyer in writing and brought to the professional that is helping with the exchange. This has to be done with forty-five days of the sale of the original rental property. More than one property can be used as the replacement property, as long as the total value does not exceed two hundred percent of the original property's value. Not all properties that are identified need to be closed either. If there are more properties on the identification document than allowed, they will be treated as regular sales and they will have tax owing on them.

After the properties have been properly identified, the buyer then has one hundred and eighty days to complete the sale of the exchange. If the original property is sold after this period or after the due date of the return, the properties will not be treated as similar property and tax will be owed.

Boot is something that needs to be avoided as it consists of money or any type of unlike kind property. This can include things such as a car being given as a down payment. This will be exchanged whether or not the exchange was carried out properly. The professional helping you with the exchange should also look at the deal to make sure that there was nothing received that could be considered boot.

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