A Quick Intro to 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.
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.
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.
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.
You only buy time to pay tax when you use 1031 exchange. Before an investor pays the tax, they stay for quite some time when they swap properties. It helps the investor avoid sudden tax obligation. The real estate investors are the main beneficiaries of the 1031 exchange.
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 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.
1031 exchange’s most common swap is that of delayed exchange. Before replacement property could be found an investor could sell their property.
Reverse exchange is a type of 1031 exchange that allows an investor to buy the property first and then pay later.
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.