When Should I Do A 1031 Exchange?
Updated: Mar 29, 2022
The potential benefits of investing in real estate using a 1031 exchange are significant enough to consider doing so. If you are interested in selling a property but believe the traditional process would offer limited benefits at this time, it may be time to consider how a 1031 exchange can help you.
The chance to maximize profits and defer capital gains taxes are among the reasons to consider this real estate investment opportunity, but timing can be a key factor. There are a couple of situations in particular that make for an optimal 1031 exchange time frame. A 1031 exchange can represent an opportunity for a “bailout” of sorts on a poor investment, or it can provide tax benefits on an investment that has performed extremely well. Every situation is unique. This is why it is important to have a professional by your side to help you through the process.
What Is The Best 1031 Exchange Time Frame?
Determining if now is the right 1031 exchange time frame for your needs means considering how this type of investment tool could benefit you. Here are a few scenarios that represent ideal situations for a 1031 exchange investment.
Is Your Property Under-Preforming?
Let’s say you are disenchanted with the performance of a real estate investment property that you already own. You want it gone, but a straight sale would cost enough to wipe out your meager profit. You can instead use a 1031 exchange to acquire a new property to replace the existing one in your portfolio. This means your sales proceeds go directly into another property. You don’t lose on your initial investment, but instead enter a new opportunity with potential growth.
Is Your Property Making Too Much Money?
Here's a different scenario. You own investment property that has appreciated substantially in value over the last few years. It is worth a great deal more now than when you bought it. You want to reap some of those benefits by selling, but the capital gains taxes you would have to pay are exorbitant, and you don’t want to foot that bill right now. Instead, you use a 1031 exchange and forward the sales proceeds into a subsequent investment property of equal or greater value. Now the money that would have gone to capital gains taxes — which could be more than 30 percent depending on your income and which state you live in — is put back to work for you, and your gains on that new investment are that much higher. This allows you to build your portfolio and overall net worth at a far faster rate.
In both situations, you benefit from using a 1031 exchange. You eventually will have to pay capital gains taxes, but with the right 1031 exchange time frame, you minimize the impact while also giving yourself the best possible opportunity to grow your portfolio’s worth.
There are some situations in which a 1031 exchange isn’t the best option. You can learn more about all of your options when you turn to professionals to assist you through the process.