1031 Exchange – What You Need to Know
Filed under: Real Estate Market
If you own any investments, such as rental properties, then it is essential that you understand how 1031 exchanges work. This type of transaction is a special strategy often used by investors who want to expand their investment properties and defer tax burden at the same time.
Today, we’re taking a closer look at 1031 exchanges and why you might consider using this method as part of your real estate investing strategy.
How it Works: 1031 Exchange
A 1031 exchange is designed for like-kind investment transactions, based on the IRS code, section 1031. If you are the owner of a rental unit, then you can use the value of the investment and transfer it to another property that is similar. This new property must have an equal or greater value compared to the original property.
When you are paid for the sale of the first property, you don’t have to pay taxes. That money is transferred into the purchase of the new property, which means that the tax burden is deferred. So, you don’t have to pay capital gains taxes at this point because there is no cash going into your pocket.
Why Consider a 1031 Exchange
There are several reasons why it makes sense to use a 1031 exchange:
- Tax Strategy: Instead of losing part of your investment to capital gains taxes, the full value of the investment is transferred into your new property purchase. You still maintain the value and equity, without having to pay taxes right now. These profits can be reinvested in the new property to help with your overall strategy.
- Equity Benefits: It makes sense to maximize your real estate equity as much as possible. This type of transfer keeps your profits in the investment since you don’t have to pay taxes when selling the first property. So, you have more equity that can be rolled into the purchase of the new property.
- Diversify Your Portfolio: If you are looking for ways to diversify your investment, then a 1031 exchange might be part of this strategy. For example, you could upgrade to a bigger rental property or something with more units. Or, the money can be rolled into a property in a new city.
- Reset Depreciation: Consider depreciation schedules when you are planning how to use your profits and equity transfer. A 1031 exchange can be helpful if you’re moving from a property with significant depreciation to a new property because you can leverage new/fresh depreciation deductions.
Need More Info About a 1031 Exchange?
If you are thinking about selling an investment property, then talk to me before making your move. I’ll help you find the ideal strategy to preserve your profits and defer capital gains taxes if possible. Send me a text, email, or call at (951) 473-0390 or [email protected].