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. With the bubble real estate was placed into in the pas popping, those who have invested everything in it are finding it necessary to break free and exchange part of there investment for other premises with hope of getting a steady flow of income. With many people in the dark on what 1031 Exchange is, only big-time investors are enjoying its benefits.
Starker Exchange is defined in the 1031 section of IRS Code and it allows investors to sell a property and not pay capital gains tax as long as they invest in another one in the same category with the money they get from the sale. 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. This has dwindled in the modern times because many investors and buyers will want both 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. Many investors in the real estate world rely on delayed investment to get time to find the property of their choice in no rush. For people who own land that is worth less than they paid to buy it, selling might not give much but it is better than keeping it. In case the property value has appreciated, a sale will guarantee a great investment deal.
Reverse exchange is another type of 1031 exchange and it means you first make the purchase but you will pay later. The only problem is that many lenders are reluctant to issue money for such an investment because your name cannot be on the title deed of the new as well as sold property. You can go around this by creating LLC for the replacement property ownership until the old once is relinquished and then you can take over the ownership. You may not always find a new property at the value of the old one. In such a case, take advantage of improvement exchange to keep payment of taxes out of question. The money that remains after the purchase goes towards construction of the property to increase value.