Financial Resource

As a real estate investor, you are aware that each and every dollar that you have invested is compounding your wealth, and, in contrast, that every dollar not working for you represents a lost chance to increase your funds. So, when the time comes to put your property up for sale, you have two choices. The first way in which you can cash in on a piece of property’s appreciated value is simply to make a outright sale and recognize the profits as a gain. This means that you’ll have to pay capital gains taxes on the sale proceeds. But every time you pay money to the government you are throwing away money that could be put back into investment.

The second and more lucrative option is to conduct a 1031 exchange. A great way to keep more of your investment funds working for you is to perform a 1031 exchange rather than making an outright sale on a property. A 1031 exchange has a provision of non-recognition; this means that you don’t have to pay the taxes immediately following your sale; in fact, you can defer the taxes for an indeterminate time span, while your funds are compounded by the extra income produced by investing your tax deferment.

By way of example, imagine that you are the owner of several small investment properties, like triplexes or duplexes, whose values have appreciated during the time you have owned them. At this juncture, your instinct may be to sell these properties up front and collect on your investments. A wise investor with an eye to the future might choose to conduct a 1031 exchange and place the money gained from these properties towards the purchase of another piece of investment property, which will, itself go on to appreciate in worth over time, meanwhile continuing to increase your wealth. The best part of all is that the money at your disposal as a result of deferring capital gains taxes will function to heighten your capacity to leverage for further loans, building up your future profits.

1031 exchanges are not limited to buildings and land, 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, as well as some types of personal property, from a backhoe or crane to an aircraft or collector car. In fact, 1031 exchanges are especially beneficial to those who have invested their funds in collectibles or antiques such as collector cars, in light greater capital gains liability on the sale of these types of items. You cannot, however, exchange things like stockor interest in an REIT.

So, next time you find that you are planning a sale on an appreciated piece of real estate or other investment property, pause for a moment and consider the future dividends you could gain were you to exchange. If you choose an exchange rather than selling outright, you can build your wealth over time and come out on top .

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