The Definition of 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 1031 exchange allows you as an investor to buy time for paying the tax.
You will not stop paying tax when you use the 1031 exchange, you only delay. 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.
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. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. Finding another property of the same kind or exchange is very difficult.
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.
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.
Reference: Full Report