A Quick Intro to 1031 Exchange
The starter exchange is also known as 1031 exchange. The 1031 exchange permit investors to defer 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. 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. To buy time due to the challenge of finding properties of the same kind the 1031 exchange allows for delays.
The capital gains tax is required every time you need to sell an investment property. You could even incur a lot when selling an investment property due to tax burdens. 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.
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 1031 exchange is mainly used by 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 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. It could happen but its possibility is very narrow.
1031 exchange’s most common swap is that of delayed exchange. Before replacement property could be found an investor could sell their property.
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.
When the property an investor is supposed to acquire is of less value than the one they want to relinquish the construction or improved exchange is used to build or enhance the property to be bought or exchanged for.