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. Without incurring tax liability an investor could acquire property 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. 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. To sell an investment property you could incur a lot due to the tax burden. BY using the 1031 exchange you make a kill when selling a rental property that has more value than the time you acquired it.
1031 exchange allows you as an investor to swap a property for another one of the same kind and value. You can avoid the tax burden by using 1031 exchange for quite a period.
You will not stop paying tax when you use the 1031 exchange, you only delay. It actually helps an investor buy time before they pay for tax. 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.
The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 exchange.
The swap of properties through the simultaneous exchange happens in a day because it’s direct. The simultaneous exchange is not that common because it is hard to find a person who owns the exact property you have. It could happen but its possibility is very narrow.
Delayed exchange is the most common type of 1031 exchange. An investor could sell their property first and then wait for some time before a replacement property could 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.