A Quick Intro to 1031 Exchange
The starter exchange is also known as 1031 exchange. The 1031 exchange permit investors to defer paying capital gains taxes on the property. Without incurring tax liability an investor could acquire property through the use of 1031 exchange.
The delayed tax burden makes it possible for an investor to acquire a low-income property that needs high maintenance. The burden of tax is removed when an investor uses 1031 exchange especially when moving investments from one location to another.
1031 exchange allows swapping of one property with another of the same kind. To buy time due to the challenge of finding properties of the same kind the 1031 exchange allows for delays.
Every time you nee to sell an investment property you are required to pay capital gains tax. The tax burdens could make very cheap to sell n investment property. However if you have a rental property that has more value than the time you acquired it you could make huge gains by using 1031 exchange to swap it.
1031 exchange allows you as an investor to swap a property for another one of the same kind and value. The tax burden is only payable after a while after property have been sold or acquired when using the 1031 exchange.
1031 exchange does not mean that an investor will avoid paying tax. It actually helps an investor buy time before they pay for tax. The 1031 exchange helps the investor avoid sudden tax obligation. The 1031 exchange is mainly used by the real estate investors.
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 simultaneous exchange allows for a direct swap of properties; the exchange happens in one day. The simultaneous exchange is not that common because it is hard to find a person who owns the exact property you have. It could happen but its possibility is very narrow.
1031 exchange’s most common swap is that of delayed exchange. The delayed exchange allows investors to sell properties while they wait for the property of the same kind to be found.
The reverse exchange requires that an investor pays all the money which may be hard to come by since the banks do not lend the money for this particular type of exchange.
Construction or improvement exchange allows an investor to use the remaining funds (in case the property an investor want to buy is less costly than the one they relinquish) to build or enhance the property they want to buy.
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