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What is 1031 Exchange?

1031 Exchange is also known as a starter exchange. It is possible for the investors to defer paying capital gains taxes on the property through the use of 1031 exchange. The 1031 exchange helps an investor to acquire property without incurring a tax liability.

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.

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 tax burden is only payable after a while after property have been sold or acquired when using the 1031 exchange.

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 real estate investors are the main beneficiaries of the 1031 exchange.

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 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. Finding another property of the same kind or exchange is very difficult.

1031 exchange’s most common swap is that of delayed 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.

The construction or improvement exchange happens when the property an investor is relinquishing is of more value than the one they plan to acquire.