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. An investor is capable of acquiring a property without incurring tax liability 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 use of 1031 exchange could even help an investor move hiher investments from one place to another without the burden of tax.
1031 exchange allows swapping of one property with another of the same kind. However it could be challenging to find another property of the same kind to swap with, for this reason, many of the exchanges takes long or get delayed.
In the event you want to sell an investment property you are required to pay capital gains tax. The tax burdens could make very cheap to sell n investment property. BY using the 1031 exchange you make a kill when selling a rental property that has more value than the time you acquired it.
You could only swap a property of the same kind and value when using the 1031 exchange. The tax burden is only payable after a while after property have been sold or acquired when using the 1031 exchange.
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. 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.
The four types of 1031 exchanges include the simultaneous exchange, delayed exchange, reverse exchange, and 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.
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.
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.
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.
Refer to: official source