Real estate investing might be one of the most profitable forms of investment all around the world, and there are many reasons for this, but the main one is that people are always looking for a plot of land, a house, an office building, and storage building, or manufacturing-capable property.
And real estate as well as residential real estate, as mentioned in this article, refer to plots of land, and properties inside said plot of land. For example, a plot of land might be filled with natural resources such as lakes, rivers, minerals, and appropriate soil for crops to grow.
The value of a real state property might differ heavily on the area it belongs to, how many benefits it has, as well as its current state. A good example of this is a well-balanced house with two bathrooms, three rooms, a living room, a kitchen room, and enough space for a backyard. Imagine that said house is not only ubicated in a safe neighborhood, but it’s also in very good shape.
Such a house is likely to cost much more than a bigger house in a really bad area of a city, known for being dangerous and unsafe. In some cases, even the loud sounds of a train near a house can substantially reduce its price when it comes to renting it or selling.
For people wanting to initiate in the world of real estate investment, there are some things you should do, but the most important one is researching about it, studying as much as you can about the risks and benefits of it.
There are people who know about it because of experience, and studies on finances come a long way, but most beginners who have the money to invest but don’t know how to do it would hire a professional advisor. For beginners, a professional advisor would be the best choice to understand section 1031 exchange, but by reading some articles you can get a grasp of how it works.
I’ll share some beginner-friendly information about it, and how it affects exchanges between assets.
The Benefits of 1031
Here’s where things get interesting. Investing in a real estate is not all about purchasing or selling. In some cases, people prefer to exchange properties where a profit is bound to happen. This profit can be incredibly boosted if you know how to benefit from the section 1031 exchange, also known as the Section 1031 under the Internal Revenue Code.
Briefly explained, it’s a form of exchange that provides benefits regarding taxes. If you manage to benefit from it, you’ll be able to avoid a tax known as gain in capital gain tax, which is related to the profit you earn from selling property in comparison to its initial price.
This tax can depend heavily on the type of property you are dealing with, how much time you’ve owned it, and the amount of profit you earn from selling it. This tax can go from 10% to 15 and 20%, usually being higher when the property is owned by less than a year.
The 1031 exchange allows people to avoid paying this tax, but there are some rules that investors need to follow to properly get the advantage of it. During 2017, some changes were performed to it and now it only covers real-estate properties, whereas before 2018 it could other types of assets and goods, including stocks, jewelry, and precious stones.
Now, to enjoy its benefits, you need to exchange real-estate properties that are similar to each other. As long as they are of the same type, their value, and whether one is of better quality than the other won’t affect the process at all. For them to be of the same type, they need to follow up some rules, which you can check in here.
Now, it’s important for you to know whether your plans align with these rules because a well-performed 1031 exchange can greatly boost your career and accelerate your profit if done well. If you know nothing about laws and finances, you might want to hire a professional to properly explain it for you and guide you during the process. Considering the benefits, the investment will be definitely worth it.