If you are an investor in the real estate sector and you plan to buy and sell a large number of properties to earn dividends from this booming sector, you must have already heard of the property. & 39; "real estate exchange". You may have already been traded & 39; Properties. If you are a beginner in the real estate business or if you need to sell your real estate investment property, you need to know what the exchange of property is. Here is a simple example to make it easier to understand:
Say you bought your house for $ 300,000 two years ago. Meanwhile, the value of your property has increased by $ 50,000. From now on, you plan to sell your home, whether for a professional move or to make a profit. If you sell your home directly to a buyer, you will be considered to have realized a capital gain of $ 50,000, which will involve the collection of a capital gains tax from the government. This will significantly reduce the profit from the sales you want to make. Instead, if you make a property exchange & 39; (which literally means the exchange of your property with a similar type property), the payment of your capital gains tax may be deferred at a later date. This will give you enough time to realize the benefits of the property now and pay the tax later, when it will become easier. In the United States, this type of transaction has been authorized by section 1031 of the Internal Revenue Service (IRS) Code; as a result, an exchange of real estate of this type is commonly referred to as a "1031 exchange".
Exchange 1031 has proven to be an effective asset protection strategy. Through this real estate exchange, a real estate investor can reinvest all the equity of a real estate sale in the purchase of a similar property avoiding the recognition of a capital gain. At the end of the transfer / exchange, the seller and the buyer benefit enormously from the transaction.
Because of the inherent benefits, the exchange of properties is becoming more and more popular among real estate businessmen. A personal residence, however, is not eligible for such an exchange. The striking benefits of a real estate exchange or a 1031 exchange in particular are:
o The capital gains tax is deferred to the benefit of the exchanger.
o Equipment with a fair market value of 15% of the prime real estate can be included in the exchange without capital gain recognition.
o It allows you to have better leverage, thus improving cash flow.
o 1031 exchanges are mainly carried out with a delayed process in three parts with the participation of a financial intermediary or hosting. This ensures a secure and reciprocal exchange of funds.
o You can achieve diversification and improvement of your real estate portfolio with the money saved through tax deferral.
Although profitable, the exchange of properties involves a complicated process. In-depth knowledge of the system is a prerequisite for a successful exchange. Although lucrative, you should consult a reputable real estate agent before embarking on a real estate exchange transaction.