Whether you’re a seasoned real estate investor or starting, you won’t turn down an opportunity for a good deal. While there are strategies circulating out there that might deliver instant success, investing in real estate is a method for building wealth.
A 1031 exchange is a strategy that has been time-tested to increase profit. In this article, we’re going to be covering this tax break for property swaps. So, what is a 1031 real estate exchange?
Read on to learn about this unique real estate strategy and how it can benefit you and your business.
What is a 1031 Real Estate Exchange?
By investing the selling proceeds of one investment property into another, investors can use a 1031 Real Estate Exchange to postpone paying capital gains tax on the sale of that asset. To qualify, the property owner must reinvest the proceeds from the sale into a similar property within a strict time frame.
1031 Real Estate Exchanges are a popular tool for investors looking to grow their portfolios without being immediately taxed on their gains. If you’re thinking of selling an investment property, you can visit a website like Startanexchange.com to learn more about what is a real estate 1031 exchange or if you want to start an exchange.
Benefits
Deferring Capital Gains Taxes
This is the primary benefit of completing a 1031 exchange. By deferring to pay capital gains taxes, investors can reinvest their profits into their investment portfolio rather than losing a sizeable chunk of it to taxes.
Enhancing Return on Investment
Another benefit of deferring capital gains taxes is that it allows investors to enhance their return on investment. This is because the reinvested funds can buy a more expensive property, which would generate a higher return.
Diversifying Investment Portfolio
A 1031 exchange also provides investors the opportunity to diversify their investment portfolio. By exchanging one property for another, investors can add new types of properties to their portfolios, which can offer different benefits and returns.
Generating Passive Income
When you sell an investment property, you’re required to pay capital gains taxes on the profit. Yet, if you reinvest that profit into another investment property through a 1031 exchange, you can defer those taxes on the sale of the property. This is a great way to generate passive income.
Risks
The most obvious risk is that the IRS may not recognize the exchange and tax the sale as a regular sale. This could happen if the properties are not considered “like-kind” or the taxpayer does not follow the proper exchange procedures.
Also, if the taxpayer does not find a suitable replacement property within the prescribed time frame, they may be required to pay taxes on the sale of the original property. Finally, if the value of the replacement property is less than the original property, the taxpayer may end up owing taxes on the difference.
Invest in 1031 Real Estate Exchange
In this 1031 exchange guide, we have discussed what is a 1031 real estate exchange, its benefits, and its risks. A 1031 Real Estate exchange is a great way to invest in real estate without paying capital gains tax. If you’re thinking of investing in real estate, a 1031 Real Estate exchange is a great way to do it.
Need more advice and tips? Continue reading our blog for more!