Real Estate Investors - Don't Just Sell, Make A 1031 Exchange

As a real estate investor, you are aware that each and every single dollar that you have working for you in an investment is compounding your wealth, and, in contrast, each and every dollar that isn't working for you is a missed opportunity to further increase your profits. So, when it comes time to make a sale on a piece of property, you have 2 options. The 1st way in which you can cash in on a piece of property's appreciated value is simply to make a outright sale and recognize a gain. Accepting this liability means you must pay capital gains taxes . But every time you pay money to the U.S. government you are throwing away money that could be put back into investment.

Your second and more lucrative option is to make a 1031 exchange. An exchange is a great way to keep more of your investment funds working for you. Section 1031 has a provision of non-recognition, which means you do not have to pay the taxes immediately; as a matter of fact, your capital gains liability are deferred indefinitely, while your funds are compounded by the extra income produced by investing your tax deferment.

As an example, imagine you are the owner of several small investment properties, such as triplexes or duplexes, whose values have increased during the time you have owned them. At this juncture, your inclination might be to make an outright sale and collect on your investments. A wise investor with an eye to the future might decide to make a 1031 exchange and put the proceeds from these properties towards buying another piece of investment property, which will, itself go on to appreciate in worth over time, meanwhile continuing to increase your wealth. The best part of all is that the extra money available to you as a result of deferring capital gains taxes will function to increase your ability to leverage for further loans, maximizing your future profits.

1031 exchanges aren't just for land and buildings, either. It is possible to conduct a 1031 exchange on any real estate you are holding for investment in a trade or business, and certain types of personal property as well, from a backhoe or crane to an aircraft or collector car. 1031 exchanges are particularly beneficial for those who have invested in antiques or collectibles like collector cars, because of the greater capital gains liability on the sale of these types of items. You cannot, however, make a 1031 exchange on things like stockor interest gained from a Real Estate Investment Trust.

So, next time you find that you are planning a sale on an appreciated piece of real estate or other investment, take a moment to think of the potential profit you could reap if you were to conduct an exchange. If you decide to conduct an exchange instead of selling outright, you can compound your wealth over time and come out ahead .

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