Study: My Understanding of Finances

What is 1031 Exchange?

You could also refer the 1031 exchange as starter 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.

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. 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.

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. It actually helps an investor buy time before they pay for tax. The sudden tax obligation is avoided through the use of 1031 exchange. The main beneficiaries of 1031 exchange are 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 exchange happens in one day through the simultaneous exchange. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. 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. The delayed exchange allows investors to sell properties while they wait for the property of the same kind to be found.

Reverse exchange is a type of 1031 exchange that allows an investor to buy the property first and then pay later.

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.