What is 1031 Exchange?
The starter exchange is also known as 1031 exchange. It is possible for the investors to defer paying capital gains taxes on the property through the use of 1031 exchange. An investor is capable of acquiring a property without incurring tax liability through the use of 1031 exchange.
Through the use of 1031 exchange, an investor could acquire a low-income property that needs high maintenance. You could even move your investments from one place to another without the burden of IRS- 1031 exchange help you do this.
The properties that could be swapped through the use of 1031 exchange must be of the same kind and value. To buy time due to the challenge of finding properties of the same kind the 1031 exchange allows for delays.
In the event you want to sell an investment property you are required to pay capital gains tax. To sell an investment property you could incur a lot due to the tax burden. BY using the 1031 exchange you make a kill when selling a rental property that has more value than the time you acquired it.
1031 exchange allows you as an investor to swap a property for another one of the same kind and value. You can avoid the tax burden by using 1031 exchange for quite a period.
You will not stop paying tax when you use the 1031 exchange, you only delay. It actually helps an investor buy time before they pay for tax. The sudden tax obligation is avoided through the use of 1031 exchange. The real estate investors are the main beneficiaries of the 1031 exchange.
The 1031 exchange terms and conditions states that both purchase price and the loan amount be the same or a bit higher than the replacement property.
There are four categories of the 1031 exchange which includes the simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange.
The exchange happens in one day through the simultaneous exchange. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. The possibility of finding an investor with the same kind of property to swap with is close to nothing.
Delayed exchange is the most common type of 1031 exchange. An investor could sell their property first and then wait for some time before a replacement property could be found.
This type of exchange is difficult to achieve since an investor will be required to part with all the money required for the purchase of the property and the banks may fail to lend.
The construction or improvement exchange happens when the property an investor is relinquishing is of more value than the one they plan to acquire.
Supporting reference: my blog