Real Estate Trading

Deferring Taxes on Real Estate Investments

Real estate has long been a highly profitable investment. Ask any financial expert, and they’ll likely recommend investing in real estate to stabilize and diversify your portfolio. Rental properties also bring in passive income and can grow your wealth and begin showing a return on your investment almost immediately upon purchase.

This is why real estate investment groups are such in-demand organizations. A reputable group can help you invest your capital in lucrative properties by pooling your resources with those of other group members. By joining a group like this, you gain access to real estate and investing expertise, as well as much larger potential benefits and ROIs (returns on investment).

Real estate is not simply a good investment because it tends to appreciate over the long run or because it is a good diversifying element in your portfolio, though. It also presents a number of means to defer taxes, as well. Did you know, for example, that real estate trading can help you delay paying capital gains taxes on an investment property?

How Real Estate Trading Works

Forbes likens real estate trading to baseball cards. When you were a kid, you may have traded several cards that you found less valuable for a single card that you believed would gain significant value over the coming years. When you bought the cards, you paid sales tax on them, but when you traded them with one of your friends, neither of you paid the IRS a dime, right? Though the process is not quite as simple as going to a friend’s house with a box of trading cards, the same can be done with investment properties through a 1031 exchange.

Basically, according to the Chicago Tribune, if you’ve purchased an investment property that has accrued a significant amount of equity, you will likely want to use that equity to purchase more investment properties. However, if you sell the property outright, you will owe capital gains taxes, which will eat into your liquid assets and limit the amount of money available to invest. However, if your property qualifies, you can perform a like-kind 1031 exchange for another property (or properties), and you will not owe any taxes until your new properties sell.

Exchanging Property for REIT Shares

If you’re interested in joining a real estate investment trust (REIT) and you currently own property independent of any real estate investment groups, you may actually trade that property for shares in your REIT in a 721 exchange. This is particularly good for investors who want to take advantage of the benefits of working with an REIT and who want to take a more hands-free approach to real estate investment. Be aware, though, that after a 721 exchange, you may not exchange your REIT shares for real estate under a 1031 exchange to defer your capital gains tax again. Fortunately, a good real estate investment group will help you understand all of your options before you join so that you can decide whether to hold on to any existing properties you own or whether you’d be better served by trading them.

There are actually numerous ways to defer paying capital gains taxes when you invest in real estate, but without expert advice and guidance, you may never know about all of your options. Trading is only one means of putting off paying the taxman, and you can see from the information we’ve shared here that even this single means offers several options and strategies.

If you’re looking for an exit strategy for a property you own and you do not want to pay taxes on it yet, getting involved in a trade with a reputable REIT may be the way to go. Then again, you may be better served by retaining that property and enlisting the aid of a real estate investment expert to help you determine the best course of action for future investments. A good REIT or real estate investing company can help you make the best decisions for your portfolio.