1031 explained – top 5 FAQs you need to know
It is worth mentioning from the very beginning that 1031 exchange is a strategy used for tax-deferment that has increased in popularity in the past years, since more and more financially successful investors have understood its benefits. It is commonly known that prices for investment and residential properties have significantly raised recently, so resorting to this 1031 exchange investment property strategy seems to be the best option nowadays for those investors who want to save some money. Here are the top 5 most frequently asked questions about this method you should definitely know about.
What does 1031 exchange actually imply?
The 1031 exchange, which is also known as “starker exchange” or “like-kind exchange” is mentioned and defined under section 1031 which is present in the IRS Code. This strategy allows investors actually to defer paying those capital gains taxes that occur the moment they sell an investment property, but this can only be possible on the condition that another “like-kind property” is bought in replace with the profit investors gained by selling the former property.
When should I consider resorting to this strategy?
This is among the top questions many people ask themselves when it comes to doing a 1031 exchange. You should know that sometimes, selling an investment property can cost you more money than you initially predicted. Resorting to 1031 exchange when owning a rental property for instance is the best choice you can make, because this comes with a series of great benefits.
How is a 1031 exchange properly done?
In order to ensure that this strategy is effective, you must exchange your property for another one that has similar value as yours, because it is this way that you manage to avoid capital gain taxes for a while. You will still have to pay taxes, but you can first focus on trading properties without having to worry about any sudden tax obligation.
How many types of 1031 exchange are?
There are four types of this type of property exchange strategy and those are simultaneous exchange, delayed, reverse and construction/improvement exchange. You should know that each of them comes with a series of great advantages and each of them is suitable for specific situations. It is advisable to do some detailed research before actually engaging in one of these types of exchanges in order to learn more about the rules and regulations related to each of them and to learn which one is best for you.
Are there any important rules to follow?
Well, yes! There are numerous rules you need to know about before doing a 1031 exchange and one of the most important of them is the like-kind property rule. In order to be qualified for this, you have to ensure that the property you are interested in buying is “like-kind”, which means that it has to be of the same character or nature and to have similar or greater value compared to the one you sell, even though they differ in quality or grade for instance.