A Quick Intro to 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.
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 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.
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 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 main beneficiaries of 1031 exchange are 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 swap of properties through the simultaneous exchange happens in a day because it’s direct. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. Finding another property of the same kind or exchange is very difficult.
The most common kind of 1031 exchange is the delayed 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.
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.