The path to profitable real estate investing isn’t always easy to navigate. A strategy that involves a 1031 exchange is a good example. Thanks to complex IRS rules, 1031 exchanges undoubtedly have a mysterious side to them. However, there are numerous advantages to this type of investment, and they are substantial enough that it’s worth becoming familiar with them. After all, it’s with very good reason that we call 1031 exchange investments “The Last Great Tax Shelter.”
The simplest way to explain a 1031 exchange is to call it a trade of one real estate investment for another. There are myriad rules that must be followed to execute one properly, but let’s focus here on why 1031 investments work for you rather than how. Here’s a summary of some of the advantages:
Many of the advantages listed above are self-explanatory, but the deferral of capital gains taxes merits a closer look. Let’s say you want to sell a property that has appreciated in value by $100,000, and that for argument’s sake, you are in the 20 percent tax bracket. (To simplify, we’re also ignoring recapture taxes, depreciation, etc.). If you were to pay $20,000 in capital gains taxes immediately, the amount you could subsequently invest would be $80,000 instead of the full $100,000 that you could invest using a 1031 exchange. If over five years that subsequent investment doubles, you will have profited only $160,000 instead of $200,000. The difference continues to compound over time and with each new investment.
At Precision Global Corporation, we recognize the benefits of fully optimizing your portfolio. If you are interested in 1031 exchange opportunities to help you achieve this, leveraging expertise is recommended because of the tangle of IRS rules. We understand the rules and are eager to partner with you. Contact us today to learn more.