Financial Resource

Article by Trisha Coppley

As a player in the real estate game, you know that single dollar that you have working for you in an investment is making you money, and, conversely, every dollar that isn’t working for you represents a missed chance to compound your wealth. So, when the time comes to put your property up for sale, you have 2 options. The first option at your disposal is simply to sell the property up front and recognize the profits as a gain. Accepting this liability means you’ll have to pay capital gains taxes. But every time you pay money to the United States government in the form of taxes, you are losing potential profits.

The second, and often more profitable choice is to conduct a 1031 tax exchange. A great way to keep more of your investment funds working for you is to perform a 1031 tax exchange instead of making an outright sale. A 1031 exchange has a non-recognition provision, meaning you do not have to pay the taxes immediately; in fact, your taxes are deferred for an indeterminate time span, while your funds are compounded by the extra income produced by investing your tax deferment.

As an example, imagine you own several small investment properties, like duplexes or triplexes, whose values have appreciated over time. At this point, your instinct might be to make an outright sale and reap the benefits of your investments. But a wise investor with an eye to the future might choose to conduct a 1031 exchange and put the proceeds from the sale of these smaller properties towards buying another, larger property, which will, itself go on to appreciate in value over time, meanwhile continuing to make you more money. The best part of all is that the extra funds available to you from your tax deferral will work to increase your capacity to leverage for further loans, building your potential profits.

1031 exchanges aren’t just for land and buildings, either. It is possible to conduct a 1031 exchange on any type of real estate you are holding for investment in a business or trade, and certain types of personal property as well, from cranes or backhoes to airplanes or classic cars. Section 1031 is especially beneficial for those who have invested their funds in antiques or collectibles like collector cars, in light greater capital gains tax liability on the sale of these types of items. You cannot, however, exchange stockor interest in a Real Estate Investment Trust.

So, next time you find that you are planning a sale on an appreciated piece of real estate or other type of property, pause for a moment to consider the profit you could gain if you were to exchange instead. If you choose to perform an exchange instead of selling up front, you can maximize your profits and come out on top.

Tags: 1031 tax exchange, capital gains taxes, estate, profitable choice, Real, time