There’s a reason why taking part in a 1031 exchange is proving to be a hit among real estate investors. Savvy investors in the cash-intensive commercial real estate sector are waking up to the benefits of swapping properties.
Many players in the sector relish the chance to stiff the IRS and not incur trouble by the bucket load. This section of the Tax Code lets you hold on to your capital gains after selling commercial property. Well, that is as long as you sink all the money into buying a new estate.
Take Advantage of Free Money
Depending on your tax bracket, you can rack up to 40 percent savings on capital gains taxes when you take part in a property exchange. That means you will be in a better financial position when making the next acquisition. Better yet, you can ride these tax benefits for life and never pay a penny to the IRS.
If you never sell the property in your life, you can pass the tax advantages to your heirs. After your demise, the tax obligation gets written off, enabling your beneficiaries to start on a clean slate.
Escape Declining Markets
It’s not uncommon for what was once a nice neighborhood to take a turn for the worse. When a once prestigious location starts falling, most inhabitants, especially tenants, pack up and head off to better areas. That means you’re likely to have spiking turnover rates in your rental property. Instead of gritting your teeth and taking the pilling losses, you can prevent the situation.
While the rental income might be on the decline, the property’s value might still be high. That trick here is to get out before the property values plummet as well. That way, you can realize a tidy profit from its sale and use the money to buy into another location.
With the help of Section 1031, you can practically move all your investments to a new location. Since you get to defer any capital gains, it would appear that you swapped one building for another in a different place.
Spread Your Risks
If the close call has you all jittery about putting all your money in one property, taking part in property exchange has your back on that as well. Under the like-kind replacement property, you can go after any building that has a commercial application. The only limitation is that the new estate must be equal or of higher value than your current property. You can purchase a commercial building whose value is twice as much as the one you sold but not more than that.
That means you can spread your purchase over difference commercial real estate sectors. For instance, you can buy a few rental houses, a block of apartments, a small office block, a warehouse, or agricultural land. Better yet, you can buy into a multi-million property under the tenants-in-common agreement. Spreading your investments over many sectors lowers your chances of getting burned and losing your hard-earned money.
Taking part in a 1031 property exchange gives you a rare chance to skip paying capital gains taxes without running afoul of the law. With proper planning, you can improve your real estate holdings and enjoy the tax benefits for the rest of your life. It also lets you create an impressive and profitable portfolio.