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Using a 1031 Exchange After a Sale

December 17, 2020

If you are gearing up to sell real estate, a business, or other investment assets, you may want to consider a 1031 exchange in order to defer taxes on these major sales and add more money to your bottom line. While you may not be familiar with this somewhat complex tax law, you can work with a knowledgeable Springfield business lawyer to understand how a 1031 exchange could benefit you as a sound strategy for wealth protection

A 1031 exchange is a tax strategy outlined in the Internal Revenue Code that allows property or business owners to gain on the sale of property used in a trade or business or held for investment, so long as the proceeds are reinvested in a “like-kind property or exchange.” This essentially means that owners can avoid paying capital gains taxes on the sale of such property if it can be shown that the money they save on these taxes will be put towards their new property or investment, and the taxes will be paid upon the sale of that next asset. What’s more, one can elect to do a 1031 exchange over and over again and leave the final property to a beneficiary as part of their estate plan, which could eliminate the tax burden altogether.

How Exactly Do 1031 Exchanges Work?

In order to complete a 1031 exchange, you will essentially have to plan for completing such an exchange before you sell the property, as you will have to assign a third party to facilitate the transaction. This third party – typically, your Springfield business lawyer – will assume all of your rights and obligations under the sale. After that, you must identify the property or like business that you propose to buy, and do so within 45 days from the sale of the original property. Then, you have approximately 180 days with which to close on the sale of the new property or investment. If you are able to meet all of these obligations, then you will not be required to pay taxes on the sale of your property until your new property is sold. As mentioned above, you can repeat this process over and over again until your death, at which point you can bequeath the property to an heir in your will or trust.

A Springfield Business Lawyer Can Help You Complete This Transaction

While a 1031 exchange may seem like a simple endeavor, it’s actually quite complicated and there is plenty of room for error. First of all, not everyone will qualify to complete a 1031 exchange – only the Internal Revenue Service can determine whether your like exchange is sufficiently similar in order to qualify, and there are a host of strict rules and regulations you must adhere to in order to complete the transaction. In addition, while it may seem like you have plenty of time to close on the sale of a new property, 180 days really isn’t that much time – particularly when you’re aiming to complete the sale of a very large or costly property or business.

That’s why it’s imperative to work with an experienced Springfield business lawyer when executing a 1031 exchange. They will ensure that you adhere to all the requirements by paying close attention to your timeline and ensure that each of these important steps are met. Contact our office today.