Tuesday, July 7, 2009

1031 Exchange

It is a Rule adopted in America for the transaction of some kind of properties by the help of Qualified Intermediary, that can be abide by all the rules formed under IRC (Internal Revenue Code) and all paper works can be easily completed related to the property and the law. This law is formed to exempt the tax in acquisition of real estate property. Real estate properties are divided into four different divisions-business use, investment, personal use and outright sale. The two types are come under the section 1031 Exchange.

This kind of property is not restricted in transacting with others. Its transaction is like a photocopy in all respect, in comparison with other property transactions. After sale of the property, or relinquished property (property under identification and exchange) the investor should identify the property within forty five days. This specified period is called ‘identification period’ and the entire exchange should be done in one hundred and eighty days. This specified period is known as ‘exchange period’.

Internal Revenue Code provides facility to exchange maximum three properties within prescribed period. The whole transaction must under market fair market value (fmv), and the fair market value should not be more than two hundred percentage during identification period. Another rule comes under this section. A property can be received in identification period violating ‘three property’ rules and ‘two hundred percentage’ rules. In that situation the value of the property should be 95% of the aggregate fair market value. This rule is called ’95 percent rule’.

In the above all transactions, the investor have to obey all paraphernalia and the exchanger must provide all the proceeds. The transaction must be on equal more amount of debt to exempt the tax, otherwise the surplus amount will be taxable amount.

At the time of transaction of the property, an investor should give his/her attention to few things. First attention should be on intermediary, because that person will prepare all the documentary proceedings. That person should a learned fellow. Otherwise all the dealings will be meaningless. Then the person should pay his/her attention towards the transaction and the rules formed to transact the property.