As a player in the real estate game, you know that each and every single dollar that you have invested is compounding your wealth, and, in contrast, each and every dollar not working for you is a lost opportunity to increase your wealth. When it is time to put your property up for sale, you have 2 options. The 1st option that you have at your disposal is simply to make a outright sale and recognize the profits as a capital gain. This means you will have to pay capital gains taxes on the proceeds. But every time you pay money to the United States government in the form of taxes, you are throwing away money that could be put back into investment.
Your second, and often more profitable option is to conduct a 1031 tax exchange. A great way to keep more of your investment funds making you more money is to conduct a 1031 exchange rather than making an outright sale. Section 1031 of US tax code has a non-recognition provision; this means you do not have to pay the taxes immediately following your sale; as a matter of fact, your capital gains liability are deferred for an indefinite time span, while your wealth is compounded by the extra income produced by investing your tax deferment.
As an example, let's say you own some small investment properties, like duplexes or triplexes, whose values have increased during the time you've owned them. At this point, your instinct might be to make an outright sale and collect on your investments. But a wise investor with an eye to the future might decide to conduct an exchange and place the money gained from the sale of these smaller investment properties towards the purchase of another piece of property, which will, itself proceed to increase in value over time, meanwhile continuing to increase your wealth. The best part of all is that the funds available to you as a result of deferring capital gains taxes will work to increase your ability to leverage for further loans, maximizing your future profits.
1031 exchanges are not limited to buildings and land, either. It is possible to conduct an exchange on any sort of real estate held for investment in a trade or business, as well as some types of personal property, from a backhoe or crane to airplanes or classic cars. Section 1031 is especially beneficial to those who have money in collectibles or antiques like classic cars, in light higher capital gains tax liability on the sale of these types of items. You cannot, however, exchange stock, bonds, or interest gained from a Real Estate Investment Trust.
Next time you find that you are planning a sale on an appreciated piece of real estate or other investment property, take a moment to think of the future dividends you could gain were you to conduct an exchange instead. If you decide an exchange rather than selling your property up front, you can build your wealth over time and come out on top .
