One of the most common strategies used by real estate investors nowadays to defer taxes when selling investment properties is the 1031 exchange. For those who do not have deep understanding of what this refers to, they should know that this exchange rule allows the investor to defer some capital gain taxes they had to pay when finding some 1031 properties for sale, as long a like-kind property is bought in replace with the money obtained from the sale of the first one. It is worth mentioning that there are four different types of 1031 exchanges and they are all explained in the article below.
The simultaneous type
The simultaneous 1031 exchange gives investors the possibility to renounce and close on a certain replacement property and they can do this in the same day. The main idea of the 1031 exchanges in the first place was to encourage direct property exchanges between two investors, yet today things have slightly changed a bit, since chances for an investor to succeed in finding another party to exchange properties with that perfect fit the needs and interests of both of them are extremely low.
The reverse one
Although the reverse 1031 exchange seems easy to understand and apply at first, things are actually not so simple the moment you engage in it. In theory, all investors have to do when selecting this type of strategy is to purchase a property and pay later for it. Yet, in order for this type of exchange to be applicable and become valid, it is essential that the purchase is all cash, which is quite a challenging thing considering that most banks on the market do not lend investors such large sums of money. The best way to benefit from the reverse 1031 strategy is to create an LLC.
The delayed one
According to experts in the field, the delayed 1031 exchange is the most commonly used in real estate. It is based on a simple and effective principle – the investor can sell the properties first and then start looking for a replacement property to close the deal. However, it is important to mention that there is a specific amount of time during which they have to find another property to exchange it with theirs and it is best to get well informed about this aspect before making any decision.
The improvement one
The improvement or construction 1031 exchange type is the perfect solution for investors who purchase a property that costs less than the one they relinquished. In order to not pay taxes for the capital gain, they can use the remaining sum of money to improve or even build on the property they have just purchased.
As it can be seen, these are the four main 1031 exchange types real estate investors can resort to. There are many benefits that come with this strategy and the most obvious one is that you manage to defer paying any capital gain taxes when selling your property investments.