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. 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 use of 1031 exchange could even help an investor move hiher investments from one place to another without the burden of tax.
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. 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.
The swap of properties through the 1031 exchange only happens when the property is 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. It helps the investor avoid sudden tax obligation. The main beneficiaries of 1031 exchange are the real estate investors.
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.
The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 exchange.
The exchange happens in one day through the simultaneous exchange. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. 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. 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.