Financial Resource

If you are a real estate investor who is about to sell a property and use that money to purchase more real estate, make a 1031 Exchange instead of just selling outright.

Making every dollar work for you compounds your wealth.  Anytime you don’t compound your wealth, you have missed an important opportunity.  A 1031 Exchange offers you one of these wealth-compounding opportunities.  Don’t ignore it.

When you sell a property, you have two basic options.  First, you sell the property outright, take your profits and pay capital gains tax on them.  Second, you could sell your property under a 1031 Exchange and not pay the capital gains tax for the foreseeable future.

There is a provision under section 1031 that allows you to defer your capital gains taxes while your wealth is compounded by investing the income produced by deferring the capital gains.

Let’s say you own a small real estate investment property.  You have kept and maintained the property for a number of years and now you want to sell and collect on your investment.  You are probably considering making an outright sale and pocketing the profits or redistributing them somehow.  You will, of course, have to pay capital gains tax on your profit.  If, however, you take advantage of the 1031 Exchange and reinvest the money from your sale in another real estate property, you can defer the capital gains tax.

The second investment property will appreciate over time, compounding your wealth.  Also, the extra money you save on the capital gains tax can be used to leverage loans against the second property at anytime in the future.  Those loans can be used to make other profitable investments that will compound your wealth even more.

A 1031 Exchange is available on any real estate you are holding for investment purposes.  It can even be used for particular sorts of personal property considered as a business investment.  You can do a 1031 Exchange on construction equipment, like a bulldozer.  If you collect antique cars, you can do a 1031 Exchange instead of an outright sale.  If you collect airplanes, a 1031 Exchange is a practical application, as well.  What really decides the matter is the large amount of capital gains involved in the sale of these types of properties.  You cannot do a 1031 exchange on interest accrued from a Real Estate Investment Trust or money from the sale of stock.

When you sell your property, the capital gains tax is a major liability.  However by making a 1031 exchange, you can defer this liability.  What precautions should you take before making this smart move? Chintamani Abhyankar provides useful advice.

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