1031 Tax Deferred Exchanges: Real Estate Investment Strategy
When one invests in real estate, there are many tax advantages.
We get to calculate depreciation into our tax returns, we get to write off expenses associated with that real estate investment, we get to earn monthly income on that investment, and we get to sell that investment for hopefully a really nice gain.
This is in addition to being able to provide housing or commercial space to another party that may need and appreciate that space, so your investment can have both a financial benefit as well as a social benefit.
But then there is that GAIN when we go to sell. At this point, if you were to simply sell and “cash out” of your investment, there are many tax consequences that don’t feel so good at this time.
Now it is VERY important that you consult with your own tax advisor, as every situation is unique to the parties selling a property.
What You Should Know Before Selling
However, there are some basic consequences to be aware of BEFORE selling your investment property. It may appear on the surface that you don’t have much gain, but there are things like depreciation recapture and state withholding penalties that can affect you more than you think.
If you have ANY intention of purchasing other investment property anywhere in the United States and its territories, and you want to LEVERAGE your gain to make the most on your investment, then 1031 Tax Deferred Exchanges are a fabulous vehicle. A 1031 exchange allows you to realize this benefit and avoid paying taxes and state penalties for now–as the word “deferred” implies. It is not a 1031 Tax credit, it’s a “deferment.”
The one very beautiful thing about this deferment is that you can defer all the way to your death, and then as your estate inherits the property, it is done so at a “stepped-up value.” This means your family can sell the next day at that stepped-up value with ZERO gain, and have no capital gains consequence!
Again, it is very important to consult with your tax advisor. But this section of the Internal Revenue Code can really make growing a real estate investment portfolio fun and lucrative! This can be VERY addicting once you understand the power of being able to leverage your gains and avoid paying the taxes for now–and perhaps forever–if you plan your exit strategy carefully.
At MikkiMoves, we are about you and your real estate needs. We can assist you with resources for real estate portfolio planning. We will help you evaluate the return on your current investments, leveraging your gains, and building that portfolio you desire for your investment goals and strategies. Call us today for your “no obligation consultation” to see how we can help you!
Common Myths about 1031 Exchanges
Myth: I have to buy the same type of property.
No, the only thing you have to keep in mind, is that it has to have “dirt”.
You can trade a single family residential for a commercial building, you can trade bare land for a condo…It just needs to be fee simple real estate, and it needs to be in the US or its Territories.
Myth: I can only trade my principal investment.
No, you also have to exchange your debt, and so you are still using other people’s money to leverage your portfolio.
Myth: I need cash out, and so I can’t do an exchange.
There are ways to limit the tax consequence and still get cash out. You may be paying tax on the “boot” but it can be much less than the overall penalties.
Myth: I can only buy one property at a time.
No, you can actually leverage out, and perhaps sell one property to buy two properties. You can also sell 2 properties and buy 1 on an exchange.
Myth: I have no idea what you are talking about.
What does that even mean? 1031 Tax Deferred Exchanges are for investment sales and purchases to delay the payment of the capital gains tax while leveraging your investment potential. Interested in investing and have questions? Call us to see if we are right for each other to work together to reach your investment goals.