The prime aim of investing in any real estate is to earn profits. Therefore, it is only natural for the investors to bet their money on that particular investment property which promises to bring back a better return; however, is not always possible. Therefore, if you don’t want to own an investment property for some reason then you can seek help of the 1031 exchange. It will let you sell it, proceed for a new property, and help you to defer the payment of the cash on the gain you have just earned.
1031 exchange structure
You can proceed with the exchange policy of properties through four basic structures:
- By a direct swap for one property for another or Simultaneous 1031 Exchange
- A deferred exchange in which the previously owned land is disposed of and can be replaced by like-kind properties (in a stipulated time period).
- A very complex reverse exchange carried out with the help of exchange accommodation titleholder.
- By improvement exchange, by using proceeds from the exchange to improve an existing replacement property or to build a new replacement property.
Meaning of Like-Kind property
Not all kinds of properties qualify for this exchange procedure. As the foremost criterion for getting selected, the property should be of use in the sphere of business or trade or investment; it should not be for personal use. The grade or quality might vary but the character and nature should be similar.
The two main impact of this tool is a postponement of tax and accumulation of wealth. By exchanging two like-kind plots, the investor opts for a plot that offers stable returns. In the run, he also maintains the equity by deferring the taxes. Therefore, if you own a vacant or raw land, you can exchange it for a better piece thereby ensuring a huge cash flow. It is perhaps the most recommended option, if you are eager to enhance your income and want to stay away from taxes to as much long as possible.