During a typical real estate transaction, you have to pay tax and other relevant fee for any financial gain from the property. However, you have always had the option to reinvest this gain in another type of real estate, like 1031 property exchange, and defer the process of tax payment.
What are the primary advantages of a 1031 property exchange?
The primary aim of investing in 1031 property exchange is to defer the due taxes from the sale of a property. Moreover, you can reinvest the capital into big scale investments, which are more diverse. For example, you can exchange a piece of vacant land for an income generating lot, while deferring the related taxes at the same time.
What are the regulations of a 1031 property exchange?
Guidelines and rules to determine a valid exchange is quite strict. An exchange can take place only when the properties are homogeneous. In addition to that, most real estate available to be used for investment will qualify with the anomaly that the both properties have to be within the United States. Though some personal properties may have had the qualifications, they are not of the same type. Certificates of trust, stock in trade, bonds, inventory, securities or debt, partnership interests, and stocks are the properties that lack due qualifications.
Does the current real estate market favor an exchange?
A professional real estate dealer can help you find out whether a 1031 property exchange will be suitable for you as a mean of investment. Owners may tend to consider offsetting a gain from property by buying an income generating real estate.
Depressed real estate come with an appreciation opportunity, while at the same time it limits the number of quality properties for investment available. In case of a tax rate increase, the amount of same type of exchange is likely to increase.