A Contract 1031 Exchange, also known as a Reverse 1031 Exchange, is a type of 1031 exchange that allows an investor to purchase a replacement property before selling their original property. In a typical 1031 exchange, the sale of the original property must occur before the purchase of the replacement property, but in a Contract 1031 Exchange, the purchase of the replacement property can occur first.
- A Contract 1031 Exchange, also known as a Reverse 1031 Exchange, allows for the purchase of a replacement property before the sale of the original property.
- This type of exchange provides the investor with greater flexibility in choosing the replacement property.
- The investor must follow strict IRS guidelines to qualify for tax-deferred treatment.
An investor owns a property worth $500,000 and wants to sell it to purchase a replacement property worth $800,000. Instead of first selling the original property and then using the proceeds to purchase the replacement property, the investor can use a Contract 1031 Exchange to purchase the replacement property first. The investor will then sell the original property and use the proceeds to pay off the loan used to purchase the replacement property. The capital gains taxes will be deferred until the sale of the original property.
- Consult a tax professional or financial advisor to ensure that the Contract 1031 Exchange is structured according to IRS guidelines.
- Consider the financial implications of using a loan to purchase the replacement property before the sale of the original property.
- Research potential replacement properties thoroughly to ensure the best fit for your goals and investment strategy.
