Why Just Sell Investment Property When You Can Exchange It Under Section 1031?
As a real estate investor, you know that dollar that you have invested is making you money, and, conversely, each and every dollar that isn't working for you is a lost opportunity to increase your wealth. When it comes time to make a sale on a piece of real estate, you have two choices. The first way in which you can cash in on a piece of property's appreciated value is simply to sell the property up front and recognize a capital gain. Accepting this liability means you must pay capital gains taxes . Every time you pay money to the U.S. government you are losing potential profits.
Your second, more profitable option is to conduct a 1031 exchange. A 1031 is a great way to keep more of your investment funds working for you. Section 1031 has a provision of non-recognition, which means you aren't obligated to pay the taxes immediately; as a matter of fact, your taxes are deferred for an indeterminate time span, while your wealth is compounded by the extra income produced by investing your tax deferment.
As an example, let's say you own some small investment properties, like duplexes or triplexes, whose values have increased during the time you have owned them. At this point, your first inclination may be to sell these properties and reap the benefits of your investments. A wise investor with an eye to the future might decide to conduct a 1031 exchange and put the money gained from these smaller properties towards the purchase of another, larger investment property, which will, itself go on to appreciate in value over time and continue to compound your wealth. Best of all, the funds available to you as a result of deferring capital gains taxes will function to heighten your ability to leverage for further loans, maximizing your potential profits.
Section 1031 doesn't apply just to buildings and land, either. It is possible to conduct a 1031 exchange on any sort of real estate you are holding for investment in your business or trade, and certain types of personal property as well, from cranes or backhoes to an aircraft or collector car. As a matter of fact, Section 1031 is especially beneficial for those who have invested in collectibles or antiques such as collector cars, in light higher capital gains liability on the sale of these types of items. You cannot, however, make a 1031 exchange on shares of stockor interest in an REIT.
Next time you find yourself planning a sale on a piece of real estate or other property, take a moment to consider the profit you could reap were you to make an exchange. If you decide to conduct an exchange instead of selling outright, you can maximize your wealth and come out ahead .
Your second, more profitable option is to conduct a 1031 exchange. A 1031 is a great way to keep more of your investment funds working for you. Section 1031 has a provision of non-recognition, which means you aren't obligated to pay the taxes immediately; as a matter of fact, your taxes are deferred for an indeterminate time span, while your wealth is compounded by the extra income produced by investing your tax deferment.
As an example, let's say you own some small investment properties, like duplexes or triplexes, whose values have increased during the time you have owned them. At this point, your first inclination may be to sell these properties and reap the benefits of your investments. A wise investor with an eye to the future might decide to conduct a 1031 exchange and put the money gained from these smaller properties towards the purchase of another, larger investment property, which will, itself go on to appreciate in value over time and continue to compound your wealth. Best of all, the funds available to you as a result of deferring capital gains taxes will function to heighten your ability to leverage for further loans, maximizing your potential profits.
Section 1031 doesn't apply just to buildings and land, either. It is possible to conduct a 1031 exchange on any sort of real estate you are holding for investment in your business or trade, and certain types of personal property as well, from cranes or backhoes to an aircraft or collector car. As a matter of fact, Section 1031 is especially beneficial for those who have invested in collectibles or antiques such as collector cars, in light higher capital gains liability on the sale of these types of items. You cannot, however, make a 1031 exchange on shares of stockor interest in an REIT.
Next time you find yourself planning a sale on a piece of real estate or other property, take a moment to consider the profit you could reap were you to make an exchange. If you decide to conduct an exchange instead of selling outright, you can maximize your wealth and come out ahead .