Property investment is a fluid market. Many opportunities abound, and then there are risky opportunities that have high return potentials. One way of doing a horizontal movement with property exchanges is to consult with experts.
Tax and property experts like 1031 Exchange Place recommend that you study the prospective property you are going to buy if this fits the requirements of a like exchange.
Continuing a Property Investments
A property investment is only as good as its returns. It can be a passive income earner, or it can be a long-term investment. Either way, if the opportunity for better earnings potential comes along, it is harder to liquidate because of the nature of real property.
It may take months before you can sell a property, no matter how impressive or tempting it may be. Additionally, there is always the question of paying taxes on the property sale. Capital gains can eat into the potential deal, and this might lead to a cash shortage to buy another property.
A Sideways Movement
Section 1031 is a property exchange clause whereby you can defer the capital gains from the sale of property for a short period while buying another like property.
Section 1031 assumes that the property sale and subsequent purchase of another property in a different location is part of the same transaction, where there is a movement in investments.
In treating these two transactions as part of one bigger deal, you can view the investment as a sideways movement, almost like moving a place of work.
This set of transactions implies that the capital gains from the sale of the property are deferred and considered only after the purchase of the new property, as long as the two properties are “like-kind.”
The difference between the price paid for the new property and the sale of the old one is used as another factor for the computation of the capital gains tax due.
At the heart of it, it is a simple law and makes for a more dynamic property market.