Guidelines on 1031 Exchange for Beginners
1031 exchange is also known as Starker exchange and it is a strategy used by investors in tax deferment. The real estate industry is no longer in a bubble as it was taken to be a decade ago and that is why many people who invested in it are opting to exchange some of what they own in this industry for properties located in different parts of the country which will bring in more cash. With many people in the dark on what 1031 Exchange is, only big-time investors are enjoying its benefits.
Under section 1031 of the IRS Code, investors are not liable to capital gains tax from the sale of investment property when they buy another like-kind investment property after the same. To understand this better, think of it as swapping properties. There are specific situations which have to be fulfilled for this to hold. 1031 exchange came into being first with the providence that the sell of your old property and investment in the new one took place within 24hours. It is no longer common to see this because many of the buyers and the sellers will want to acquire all the properties.
Delayed exchange also holds in eyes of the law whereby the seller has a window period of 180 days or months to get a similar property to invest in. It is common with many investors today because it is more than enough time to find the right property. If the property you have currently cannot amount to the money you spend in buying it, you will benefit from selling. On the other side, those who have land that has appreciated considerably will enjoy delayed exchange because they can get more properties from the returns of the sale.
Reverse exchange is another type of 1031 exchange and it means you first make the purchase but you will pay later. Even though this exchange is simple, finding a lending institution to finance the deal is the difficult part because it is confusing on which property they can sell in case you do not honor the repayment terms because your name will not be written on the deeds of both properties. By creating an LLC for the property you want to invest in, you will have solved this issue and you will be able to change the deed f the new property to have your name after you have completed the sale. Finding a property that costs exactly the amount the old one was sold at is difficult. You many use improvement exchange requirement to avoid paying taxes.