What is 1031 Exchange?
You could also refer the 1031 exchange as starter exchange. It is allows people to invest in properties by deferring paying capital gains taxes on the property. The 1031 exchange helps an investor to acquire property without incurring a tax liability.
So if you want to acquire a low-income property that requires high maintenance you could do this without incurring tax burden through the use of 1031 exchange. You could even move your investments from one place to another without the burden of IRS- 1031 exchange help you do this.
1031 exchange allows swapping of one property with another of the same kind. It is daunting to find properties of the same kind and value, so the 1031 exchange allows for delays which make it possible to buy time.
In the event you want 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. BY using the 1031 exchange you make a kill when selling a rental property that has more value than the time you acquired it.
You could only swap a property of the same kind and value when using the 1031 exchange. 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. It helps the investor avoid sudden tax obligation. The real estate investors are the main beneficiaries of the 1031 exchange.
The rules of the 1031 exchange requires that both the 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. Finding another property of the same kind or exchange is very difficult.
Delayed exchange is the most common type of 1031 exchange. Before replacement property could be found an investor could sell their property.
Reverse exchange is a type of 1031 exchange that allows an investor to buy the property first and then pay later.
The construction or improvement exchange happens when the property an investor is relinquishing is of more value than the one they plan to acquire.