Most real estate investors are happy to use any strategy that allows them to save on their tax bills. One tax deduction strategy you’ll hear a lot about is the “1031 swap” which allows you to defer the amount you owe on taxes.
What is Exchange 1031? Basics for Real Estate Investors
If you are a real estate investor, or if you are an aspiring investor, you will want to know about similar exchanges because they give you the opportunity to switch your real estate investments on a tax-deferred basis. You can use the 1031 exchange to defer capital gains taxes indefinitely even after your death, making it a powerful tool for building and maintaining wealth. A 1031 exchange is a type of tax-deferred exchange, also known as a like exchange.
A 1031 swap is common in real estate investing, exchanging one eligible investment for another of equal or greater value without having to pay federal taxes on profits. This can be very beneficial for all parties involved and act as a vehicle for owners and investors.
The process is a way of exchanging real estate under certain terms which results in deferred capital gains. Real estate owners have the opportunity to modify or exchange current real estate without recognizing capital gains, so the investment continues to be tax-deferred. By taking advantage of 1031 exchange properties for sale, investors can also receive profits on property purchases outright.
Improved Cash Flow and Income
In addition to building wealth through capital appreciation, owning a property with positive cash flow is a great way to grow your money quickly. You can trade non-income-generating properties such as vacant land for commercial buildings or rental properties that provide you with monthly income and positive cash flow.
For Portfolio Diversification and Expansion
Owning only one asset, or several of the same types exposes you to more risk if the market goes down. Since you can diversify your assets and reduce the risk of owning only one or one type of property if you buy multiple properties through a single 1031 exchange.
If you decide to sell your rental property, you must recover the depreciation and pay taxes on it. It usually shows up at around 25%. With a 1031 exchange, depreciation is carried over to the replacement property and deferred until a taxable sale of the replacement property occurs.
For Tax-Free Transfer of Assets and Profits
We mentioned that the only time you’ll pay deferred taxes is when you sell. However, if an investor chooses to keep the replacement property for an extended period, in the event of death, the deferred tax is removed when the profits and property are transferred to your beneficiaries.
To Free Up More Capital
Tax savings mean more purchasing power is available for you to invest in other assets. You can take your cash and get a more expensive and high-value substitute, using the proceeds of the exchange as a down payment.
1031 exchange for sale is a solution for individuals and companies looking to build wealth through real estate investing.