A Quick Intro to 1031 Exchange
The starter exchange is also known as 1031 exchange. The 1031 exchange permit investors to defer paying capital gains taxes on the property. The 1031 exchange helps an investor to acquire property without incurring a tax liability.
The delayed tax burden makes it possible for an investor to 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.
Only the properties of the same kind and value could be swapped through the use of 1031 exchange. 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.
In the event you want 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. 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 tax burden is only payable after a while after property have been sold or acquired when using the 1031 exchange.
1031 exchange does not mean that an investor will avoid paying tax. 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 rules of the 1031 exchange requires that both the 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. 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.
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.
The construction or improvement exchange happens when the property an investor is relinquishing is of more value than the one they plan to acquire.