If you’re a real estate investor, then you’ve heard about a 1031 Exchange. Well, what is it really?
A 1031 Exchange allows an investor to defer paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property. Yes, that’s right; you get to defer paying taxes until a later date if you buy a “like-kind property.”
In order to do a 1031 exchange correctly, you must exchange one property for another property of similar value. An important key is that both the purchase price and the new loan amount must be the same or higher on the replacement property. That means if an investor were selling $100,000 dollar property in Steubenville that had a $65,000 dollar loan, then the investor would have to buy another $100,000 dollar property or more of replacement property with at least $65,000 dollars or more leverage.
Now that you understand the 1031 Exchange, lets discuss the different types of 1031 Exchanges.
Simultaneous Exchange – allows an investor to relinquish and close on a replacement property on the same day.
Delayed Exchange – allows an investor to sell their investment property first, and find a replacement property within a certain amount of time with the Internal Revenue Code.
Reverse Exchange – this is where an investor purchases a property all in cash and and then gets a loan. This is very uncommon because it requires the bank to lend you money on a property that you don’t have title to.
Construction/Improvement Exchange – this allows an investor to sell a property and purchase a replacement property, but allows them to use the remaining funds to build or improve the property.
If you have more questions about the 1031 Exchange or have the perfect properties to give it a try, feel free to contact us at 740.346.2899 so that we can help you with your Real Estate Needs.