The Power of 1031 Exchanges
Why 1031 exchange?
This strategy and financial tool is all about preserving your gains on direct investments in real estate, and snowballing those tax savings to grow your portfolio larger, faster, and more profitably.
This is a provision of the Internal Revenue Code (IRC) Section 1031. That means there is no ‘fancy footwork’ or trying to sneak around the law. In fact; the IRS expects you to take this MASSIVE TAX BREAK as a real estate investor. It’s built into the tax rates. So by not using a 1031 exchange investors are essentially just voluntarily overpaying the IRS by tens of thousands of dollars each year.
The big deal here is that investors are able to defer taxes on the gains made at the time of selling an investment property.
The Wall Street Journal’s MarketWatch reports that investors should normally expect to pay a rate of 25% on capital gains. So utilizing an exchange on a property you sell for a $1M gain, may be able to save you as much as $250,000 in taxes. That’s just on one transaction.
The goals is normally to defer tax liability to a year or years when your tax rates are much lower, or can be offset by other paper losses. In the meantime investors enjoy compounding gains annually on the extra double digits they are able to invest for themselves versus handing over to the tax man.
Disclaimer: Each individual investor has a unique financial and tax situation. Before making any financial moves it is only smart to consult with appropriately licensed professionals that can give you customized advice and strategies based on your individual circumstances and goals.