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.”
A 1031 Snapshot
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:
- No taxes are due, at the time of the exchange, on the capital gains associated with the property you are relinquishing.
- This lets you maximize the amount of your subsequent investment, so your return on that subsequent investment is greater as well.
- Although capital gains taxes will be due when you “cash in” in the future if you don’t do another 1031 exchange, you have the flexibility to time this event for when it’s most beneficial. An example would be when you’re retired, with no wage income, and perhaps in a lower tax bracket.
- There’s flexibility in the types of real property in which you can invest. At Precision Global Corporation, for example, we have identified tremendous opportunities in investments in assisted living and memory care facilities — but the investment property you might relinquish to take advantage of this does not have to be related to the health care industry. Put your money where the best opportunities are.
- If you want to sell a property and keep some of the profits but invest the rest and still access the 1031 exchange benefits, there are rules that allow a partial 1031 exchange.
Appreciating Compound Appreciation
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.
