Understanding the 1031 Exchange Rule.
If there is one thing you should not ignore as a property owner is the section 1031 of the IRC. If you are hoping to use your properties to get more revenue then this is one of the tax codes which can help you reduce the amount of tax you have to pay. Nevertheless, this section 1031 has further instructions on the conditions and terms which have to be fulfilled before someone is exempt from paying the taxes. You should not think that just because you bought a certain property because you loved something about it there will be no taxes to be paid because this is as good as any other business according to the IRS. You can only exchange properties under the section 1031 if you are dealing with properties which are used for investment purposes or conducting business operations. Thus, people who own residential homes are exempt from this exchange.However, there is a loophole in this exchange system for people who have vacation homes. However, this applies if it also doubles as a rental.
Nonetheless, you cannot just say the vacation home is a rental for the sake of the exchange. You have to show concrete proof that it has been rented out for at least 6 months in a year. You stand a better chance if the period has been longer. Additionally, the move to the next house will not be immediate but rather after one year. Note that the section also gives you some time so that you can find someone to swap with. Note that this kind of exchange is only allowed for properties which go for the same value which is why you will have some difficulties finding someone to swap with. Also, you might find a property but the owner might not be ready to swap. In such a situation, the cash from the sale of the house will be held by a third party until the exchange takes place.
Technically, you will have to pay taxes but this situation will give you extra benefits. You will have deferred your taxes and you can continue doing that for your whole life. Nonetheless, you have to keep update with the 1031 exchange terms and you can click here for more info. You will only be allowed to do this if the property you are selling is equal in value with the other one or if the value is much more valuable than what you previously had.