3 Resources Tips from Someone With Experience

What is 1031 Exchange?

The starter exchange is also known as 1031 exchange. It is allows people to invest in properties by deferring 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.

The properties that could be swapped through the use of 1031 exchange must be of the same kind and value. 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.

The capital gains tax is required every time you need to sell an investment property. The tax burdens could make very cheap to sell n investment property. A rental property that has risen in value could make huge capital gains when sold through the use of 1031 exchange.

The swap of properties through the 1031 exchange only happens when the property is of the same kind and value. The 1031 exchange allows you as an investor to buy time for paying the tax.

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 1031 exchange helps the investor avoid sudden tax obligation. The main beneficiaries of 1031 exchange are the real estate investors.

Both the purchase price and the loan amount are required to be the same or a bit higher than the replacement property according to the terms and conditions of the 1031 exchange.

There are four categories of the 1031 exchange which includes the simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange.

The swap of properties through the simultaneous exchange happens in a day because it’s direct. 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.

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.