What Is a Real Estate Exchange and Why Do Investors Love It?

The idea of a tax deferred real estate investment has many investors chomping

There is so much talk about real estate these days that it bodes ill for those with an interest in investing. One of the things that makes investing so attractive is the thought of getting tax deferment. How does a 1031 exchange work and is it really worth the trouble of getting involved with this type of arrangement?

When it comes to real estate, there are a lot of different terms that can make the jargon a little bit difficult for most people. If you have no experience buying or selling homes then you probably have not come across the term “deferred tax deferred.” A 10 31 exchange allows real estate investors to delay tax liability on the actual sale of an existing property by utilizing the appreciated sale of assets to obtain a new house. The basic concept is that even if the investor did not actually receive any money from the actual sale, there is still no taxable income. In other words, instead of gaining cash from the sale, the gain is covered by the appreciation s to the new house. This is a very attractive option for real estate investors who might not otherwise be able to afford a home.

It is important to note that not all states allow investors to use these types of transactions

Another term that investors might come across when they are looking into real estate transactions is “cost basis.” This term basically means that properties will be sold based on what is being quoted as the market value today. In other words, properties sold under this classification will be sold at what is known as a cost basis which means that the actual sales price will be used to determine the gain. This option is appealing to many real estate investors, since the gain on these types of transactions is not taxable unless the gain is over a certain amount.

In fact, many states do not allow investors to conduct these types of transactions in their state. In these states, if a real estate investor were to sell a house to someone in another state, the gain would be taxable. Therefore, it is advised that investors consult with a tax professional and discuss the pros and cons of the 10 31 exchange.

real estate can be a great source of passive income

One of the main reasons that these transactions are so popular with real estate investors is because of how they can avoid paying capital gains taxes. Real estate gains are not taxable unless they are over a set amount. The set amount is usually between five percent and ten percent depending on the year that the property was purchased. However, real estate can gain in value even if a property is not bought for a set amount.

Another reason why investors like the 10 31 exchange is because it allows them to take advantage of real estate depreciation. Although real estate depreciates, it does so slowly. As a result, investors can benefit from using depreciation to their advantage. For example, if an investor has a property that is worth a hundred thousand dollars one year and it only is worth fifty thousand dollars the following year, the investor can sell the property for a much higher price and expect to pay less in capital gains taxes. This is the primary reason that real estate experts recommend that people find an appropriate real estate investment opportunity and use the 10 31 exchange to take advantage of the depreciation.

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