What is 1031 Exchange?
You could also refer the 1031 exchange as starter exchange. The 1031 exchange permit investors to defer paying capital gains taxes on the property. An investor is capable of acquiring a property without incurring tax liability 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. However it could be challenging to find another property of the same kind to swap with, for this reason, many of the exchanges takes long or get delayed.
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. A rental property that has risen in value could make huge capital gains when sold through the use of 1031 exchange.
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.
You will not stop paying tax when you use the 1031 exchange, you only delay. Before an investor pays the tax, they stay for quite some time when they swap properties. The sudden tax obligation is avoided through the use of 1031 exchange. The main beneficiaries of 1031 exchange are 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.
The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 exchange.
The simultaneous exchange allows for a direct swap of properties; the exchange happens in one day. Due to the difficulty in finding a person with the same kind of property the simultaneous exchange is not that common. Finding another property of the same kind or exchange is very difficult.
Delayed exchange is the most common type of 1031 exchange. The delayed exchange allows investors to sell properties while they wait for the property of the same kind to be found.
Reverse exchange is a type of 1031 exchange that allows an investor to buy the property first and then pay later.
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.