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What is 1031 Exchange?
You could also refer the 1031 exchange as starter exchange. It is possible for the investors to defer paying capital gains taxes on the property through the use of 1031 exchange. Without incurring tax liability an investor could acquire property through the use of 1031 exchange.
Through the use of 1031 exchange, an investor could 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.
The properties that could be swapped through the use of 1031 exchange must be of the same kind and value. To buy time due to the challenge of finding properties of the same kind the 1031 exchange allows for delays.
Every time you nee to sell an investment property you are required to pay capital gains tax. You could even incur a lot when selling an investment property due to tax burdens. BY using the 1031 exchange you make a kill when selling a rental property that has more value than the time you acquired it.
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 1031 exchange helps the investor avoid sudden tax obligation. 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.
The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 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. 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. 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.
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.