A Quick Intro to 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. Without incurring tax liability an investor could acquire property through the use of 1031 exchange.
The delayed tax burden makes it possible for an investor to acquire a low-income property that needs high maintenance. 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. It is daunting to find properties of the same kind and value, so the 1031 exchange allows for delays which make it possible to buy time.
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. However if you have a rental property that has more value than the time you acquired it you could make huge gains by using 1031 exchange to swap it.
The swap of properties through the 1031 exchange only happens when the property is of the same kind and value. The 1031 exchange allows you as an investor to buy time for paying the tax.
You only buy time to pay tax when you use 1031 exchange. It actually helps an investor buy time before they pay for tax. The 1031 exchange helps the investor avoid sudden tax obligation. The 1031 exchange is mainly used by 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.
The four types of 1031 exchanges include the simultaneous exchange, delayed exchange, reverse exchange, and construction or improvement exchange.
The simultaneous exchange allows for a direct swap of properties; the exchange happens in one day. 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.
The most common kind of 1031 exchange is the delayed exchange. Before replacement property could be found an investor could sell their property.
Reverse exchange is a type of 1031 exchange that allows an investor to buy the property first and then pay later.
The construction or improvement exchange happens when the property an investor is relinquishing is of more value than the one they plan to acquire.