22 Lessons Learned: Investments

Everything to Know About the 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.

Through the use of 1031 exchange, an investor could acquire a low-income property that needs high maintenance. The burden of tax is removed when an investor uses 1031 exchange especially when moving investments from one location to another.

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.

The capital gains tax is required every time you need to sell an investment property. 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 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. 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 real estate investors are the main beneficiaries of the 1031 exchange.

Both the purchase price and the loan amount are required to be the same or a bit higher than the replacement property according to the terms and conditions of the 1031 exchange.

The simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange are the four types of the 1031 exchange.

The exchange happens in one day through the simultaneous exchange. Due to the difficulty in finding a person with the same kind of property the simultaneous exchange is not that common. 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. An investor could sell their property first and then wait for some time before a replacement property could 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.

Another Source: our website