Prove your intent The first thing the IRS examines in a 1031 exchange is your intent. The intent with which you purchase a property and use it plays a significant role in determining whether or not you will qualify for a 1031 exchange. Properties utilized for personal use don't qualify for a 1031 exchange. Only those properties that are held for use in trade, business, or investment purposes are eligible for a 1031 exchange. What does the 'Safe Harbor Rule' say? In 2008, the IRS included the safe harbor rule to the initial tax code. The rule states that so long as the investor adheres to 1031 exchange guidelines, the IRS will not question whether a dwelling unit as property held for productive use in a trade or business or investment purposes. Fulfilling the following requirements, you can determine whether or not your vacation property qualifies for a 1031 exchange. (a) The investor must own the dwelling unit for at least 24 months before opting for a 1031 exchange. This time frame is known as the 'qualifying use period.' (b) During the qualifying use period, in each of the two 12-month duration - (i) The investor must rent out the dwelling unit to another person for 14 days or more at a fair monthly rental, and (ii) The investor must not use the dwelling unit for personal use for more than 14 days or 10 percent of the number of days during the 12 months when the property was rented. Is your vacation home eligible for a 1031 exchange? The IRS had included the safe harbor rule to provide guidance. However, it isn't the only criteria used in a 1031 exchange. Tax rules are the interpretation of case law that may vary from situation to situation. The following factors will tell you whether or not your vacation home qualifies for a 1031 exchange -
When doing a 1031 exchange on a vacation home, it's required to prove investment intent. The safe harbor rule explains the 1031 exchange eligibility of vacation homes. However, other factors may also impact qualification. Therefore, whether you sell or purchase a vacation home using a 1031 exchange, you must prove that the property is held for use in business, trade, or for investment purposes. Your intent is what matters the most and which can qualify your vacation home for a 1031 exchange.
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Buying a real estate property at a discounted price can make any investor happy. That's why the number of investors looking for 1031 exchange property for sale has increased. As properties put on sale are likely to cost less than premium properties, more and more 1031 investors look for such properties that can be purchased at a discounted price.
1031 Exchange Explained - Section 1031 of IRC or a 1031 exchange or a tax-deferred exchange of property is an arrangement that allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. Properties involved in 1031 exchanges must be held for use in trade, business or for investment purposes. For example, an investment property can be exchanged for another using a 1031 exchange. Only personal properties don't qualify for a 1031 exchange. One of the 1031 exchange rules requires investors to involve a Qualified Intermediary in their respective 1031 exchanges. Similarly, there are many other rules that a pursuant of 1031 exchange must adhere to. 1031 Exchange Property Rules - A 1031 exchange investor can identify any number of replacement properties using any of the following rules -
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October 2019
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