The 10 Most Unanswered Questions about Plans
A Quick Intro to 1031 Exchange
1031 Exchange is also known as a starter exchange. It is allows people to invest in properties by deferring 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.
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. You could even incur a lot when selling an investment property due to tax burdens. A rental property that has risen in value could make huge capital gains when sold through the use of 1031 exchange.
1031 exchange allows you as an investor to swap a property for another one 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.
The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 exchange.
The simultaneous exchange allows for a direct swap of properties; the exchange happens in one day. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. It could happen but its possibility is very narrow.
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.
Source: published here