Practical and Helpful Tips: Investments

January 9, 2017

financial

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Everything to Know About 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.

The delayed tax burden makes it possible for an investor to acquire a low-income property that needs high maintenance. You could even move your investments from one place to another without the burden of IRS- 1031 exchange help you do this.

The properties that could be swapped through the use of 1031 exchange must be of the same kind and value. 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. A rental property that has risen in value could make huge capital gains when sold through the use of 1031 exchange.

The swap of properties through the 1031 exchange only happens when the property is of the same kind and value. You can avoid the tax burden by using 1031 exchange for quite a period.

You only buy time to pay tax when you use 1031 exchange. It actually helps an investor buy time before they pay for tax. It 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 four types of 1031 exchanges include the simultaneous exchange, delayed exchange, reverse exchange, and construction or improvement exchange.

The swap of properties through the simultaneous exchange happens in a day because it’s direct. It is not common to find investors using the simultaneous because it is difficult to find another investor with the same kind of property. The possibility of finding an investor with the same kind of property to swap with is close to nothing.

1031 exchange’s most common swap is that of delayed exchange. Before replacement property could be found an investor could sell their property.

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.

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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