Interesting Research on Funds – Things You Probably Never Knew
The Definition of 1031 Exchange
1031 Exchange is also known as a starker 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.
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. 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. To sell an investment property you could incur a lot due to the tax burden. A rental property that has risen in value could make huge capital gains when sold through the use of 1031 exchange.
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.
1031 exchange does not mean that an investor will avoid paying tax. 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 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. 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. 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.