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How Does a 1031 Exchange Work? Important Things to Know

As many as 63% of people in the United States have investments in real estate. Real estate is arguably one of the most popular types of investments around, most likely because it can be so efficient and can be a great long-term investment. But how does a 1031 exchange fit in?

You may have heard of a 1031 exchange before but you may have no idea what it is or how it works in the realm of real estate investing. Fortunately, this guide will teach you everything you need to know about 1031 exchange rules and the benefits of 1031 exchanges. Keep reading and learn more about how it works below.

What Is a 1031 Exchange Exactly?

A 1031 exchange, as the name suggests, involves exchanging one piece of real estate for another. But how is this possible, you might ask? More importantly, why would you ever do such a thing?

Many investors use this exchange to their advantage in a variety of ways. The main thing to keep in mind is that when you exchange one piece of real estate for another, the capital gains taxes involved will be deferred. This type of exchange is far more common than you might expect.

Many companies and real estate agents are involved in these exchanges all the time. After all, they can be quite beneficial if you know how to do it right. However, if you do it incorrectly, you could end up with a lot of tax troubles among other things that you need to worry about.

The main benefit of a 1031 exchange, as long as you do it correctly, is that it can be a huge tax break for you. Again, this is due to the way the capital gains taxes on a property get deferred when you swap that property with another. But what about the proceeds?

The Details

Unfortunately, the proceeds from this property swap will not go to you. However, that doesn't mean that you can't take advantage of them. On the contrary, these proceeds go to a third party which you can then use to invest in another piece of real estate.

This, of course, can put you on the right track to building a lot of revenue with real estate.

Another benefit is that you can do 1031 exchanges as often as you want. This is because there is no legal limit or restriction on how many times you can pull off this exchange.

The main downside of doing this is that it can often be difficult to swap your property with a property that is more or less the same as yours. As a result, you may have to wait a while for the exchange to happen or you may have to work with a third party to help you out. Whatever the case, once you can get an exchange to happen, you can enjoy the tax benefits it has to offer.

All About the 1031 Exchange

A 1031 exchange can be a bit complicated to understand at first, but once you get the hang of it, you'll find that it is not all that hard to understand. It can even be quite beneficial tax-wise.

To learn more about these exchanges, contact us here.

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