Benefits Of The 1031 Tax Exchange For Property Investors
If you’re a property investor - or are considering putting your money into real estate, - make sure you are aware of the 1031 exchange. It’s a common strategy that many investors use to limit their exposure to tax. In IRC 1031, investors can sell or give up a property and reinvest the proceeds into another, with the tax due being deferred. Let’s take a closer look at some of the many benefits the 1031 exchange can bring anyone seeking to bolster their property portfolio.
Defer your taxes
As we mentioned above, the 1031 exchange enables you to defer the tax you have to pay on a sold property at a later date. In effect, this allows you to use money due to the government to grow your property holding and defer your tax-deferred exchanges.
Reinvestment
The 1031 exchange allows you to reinvest that tax money into new property, giving you more leverage when it comes to prices. You might be able to buy a property that is significantly more valuable than you could before, as an example. Or, you could even purchase several properties, and enjoy all the investment benefits that come with it.
Climb the ladder
With this in mind, it’s clear that it is possible to use the 1031 exchange to trade up your property for one of higher value. And, you can keep doing this for as long as you wish. This puts you in a position of plowing as much money as possible into your portfolio and growing it to a level that would otherwise be out of reach. It will help you become a lot more competitive. Even with a single property, there are significant tax gains to draw upon. You can expect a large increase in your cash flow and your net worth will rise. Not only that but when your portfolio is passed down to your kids, it could be possible for them to eliminate a lot of their tax burden. We’ll look a little closer at that later.
Easing your responsibilities
As any property investor will tell you, the process isn’t as easy as buying a building and watching the profits roll in. You will be responsible for your tenants, and when you ramp this up across several properties, it can be a high workload. Not to mention the expense! Struggling investors can instead use the 1031 exchange to replace current properties with managed alternatives. It’s an easier way to manage your portfolio when your responsibilities are bursting at the seams.
No legacy
As Benjamin Franklin once said, nothing is certain in life except death and taxes. And, even death can’t escape the IRS - your heirs will be liable for all your unpaid tax. However, if you die after using 1031, things are a little different. You will still accumulate capital gains tax that needs to be paid. But, your heirs will not be liable for those accumulations. Instead, they will only have to pay for the adjusted, current value of the property.