Real estate investors have a lot to think about when selling off assets. Luckily, the IRS provides a regulatory framework for them to swap assets and defer capital gains taxes or any other losses until a later date.
Here are three different types of tax exchanges for investors to consider when getting rid of assets.
1031 Simultaneous Exchange
The 1031 exchange is often used in real estate investment to sell or swap a property without paying capital gains up front. This legal environment makes it easier for investors to switch properties if the one they’ve purchased doesn’t work for their needs.
A 1031 simultaneous exchange occurs when both properties are swapped at the same time. If two property owners have a mutual interest in exchanging property, this rule allows them to do it without much friction.
Reverse 1031 Exchange
In some cases, investors need more flexibility to continue operating when exchanging assets. The 1031 framework also allows investors to acquire the other property while holding onto their current one.
A reverse 1031 exchange allows investors to purchase the new property before relinquishing their assets to the other party. While it offers some advantages, strict rules exist against holding both pieces of property simultaneously.
721 Exchanges
Property owners might want to invest in other areas with their real estate value. A 721 exchange allows business partners to use their property to gain interest in REIT companies while deferring capital gains taxes.
REIT organizations are known for being somewhat volatile, so it’s essential to do your research before committing. Remember, some properties are excluded from this type of agreement. Learning how to decide if a 721 exchange is right for you is a good place to start.
Understanding Exchanges Will Save You Money
In any investment, it’s essential to set safeguards that prevent financial decisions from derailing income opportunities.
Understanding the ins and outs of the tax code is essential for avoiding liabilities and fines. Learning about these three different types of exchanges will give investors a good place to start.
