The Definition of 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. The 1031 exchange helps an investor to acquire property without incurring a tax liability.
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.
Only the properties of the same kind and value could be swapped through the use of 1031 exchange. 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. 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.
The swap of properties through the 1031 exchange only happens when the property is of the same kind and value. You can avoid the tax burden by using 1031 exchange for quite a period.
1031 exchange does not mean that an investor will avoid paying tax. 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 main beneficiaries of 1031 exchange are the real estate investors.
The 1031 exchange terms and conditions states that both purchase price and the loan amount be the same or a bit higher than the replacement property.
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. The simultaneous exchange is not that common because it is hard to find a person who owns the exact property you have. 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. The delayed exchange allows investors to sell properties while they wait for the property of the same kind to be found.
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.
Refer to: my website