1031 exchange should be one of the options
If you correctly use the 1031 exchange, you can own a property with a cash transaction as low as nothing. This is known as a ‘zero cash flow transaction’. The only cost would be that the rent checks that would have normally come to you would now go the third party. A zero cash flow transaction will almost be like a bond, where in the bank will invest the majority - almost 90 percent of the value of the property. In return, the bank has to be paid with the checks of rent. However, there are some preconditions to these transactions, like the qualification of the property and the value of the transaction.
There are rules of the 1031 exchange transaction laid down by the US tax code and treasury transactions. If these are met, the owner can avail deferment taxes as well. The first part says that the properties involved should be of the same kind in terms of value and should be used for business, trade or investments. The second part of this law stipulates that the proceeds of the sale should go to buying a new property which should be similar in kind. If not used for buying the same value of property, the net savings that are made will qualify for the taxes.
This option should be looked at as a replacement method when one is selling the primary dwelling and taking a replacement which is almost equivalent in value. Otherwise, any net gains from the transaction would be liable to be taxed under the head of capital taxation.
There are some timelines associated with the 1031 transactions as well. Specifically, there are two timelines that one has to be aware of. One is the identification period and the other is the exchange period. The identification period refers to the period of identifying the right property for replacement and is around 45 days. The exchange period is the time between relinquishing the property and getting the replacement. This period should be within 180 days.
