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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. An investor is capable of acquiring a property without incurring tax liability through the use of 1031 exchange.
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.
1031 exchange allows swapping of one property with another of the same kind. However it could be challenging to find another property of the same kind to swap with, for this reason, many of the exchanges takes long or get delayed.
In the event you want to sell an investment property you are required to pay capital gains tax. To sell an investment property you could incur a lot due to the tax burden. 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.
You could only swap a property of the same kind and value when using the 1031 exchange. The 1031 exchange allows you as an investor to buy time for paying the tax.
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. The sudden tax obligation is avoided through the use of 1031 exchange. The 1031 exchange is mainly used by 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.
There are four categories of the 1031 exchange which includes the simultaneous exchange, delayed exchange, reverse exchange and the construction or improvement exchange.
The simultaneous exchange allows for a direct swap of properties; the exchange happens in one day. Due to the difficulty in finding a person with the same kind of property the simultaneous exchange is not that common. It could happen but its possibility is very narrow.
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.
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.
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