What Are the Best 1031 Exchange Benefits
If you are wondering what is a 1031 exchange, it is a process that involves a swap of an investment property for another. A 1031 exchange may also be referred to as a like-kind exchange Many swaps of investment properties are taxable as sales, however, if your swap or exchange meets the requirement set under IRS Section 1031, you will have not tax or the tax due could be limited at the time you do the exchange. What this means is that you may change your investment without having to cash it out or needing to recognize a capital gain. When that is the case, it allows the investment to grow tax-deferred.
Often, there is no limit on the number of times or the frequency you are able to do 1031. As an investor you are able to roll over your gain from an investment property to another and another. It is likely that you will gain profit during every swap, but you avoid having to pay tax until that time you sell the investment property for cash. This could happen many years later. So, you will pay only one tax after making all those swaps. The provision for 1031 is tagged on investment and business properties, but there may be some exceptions where former primary residence may also be considered in 1031 exchange. That being said, what are other benefits that you can enjoy from a 1031 exchange?
- Increased Cash Flow
Real estate investors can utilize 1031 exchange as a tool to help increase their cash flow. This is because by deferring taxes, they are left with more cash on their hands. This is an opportunity that savvy estate investors have taken advantage of for many decades. When you opt to execute 1031 exchange on a property, you are able to legally delay the payment of taxes on investment gains after selling a qualified property.
Take for example, you sell a business or investment property at a profit, you will have to pay tax based on the gain during the time of the property sale. However, IRC code Section 1031 offers an exception in that you can postpone the payment of the fee on your gain if you decide to reinvest it within a similar property or like-kind property. The assumption or the difference here is that you are not selling but rather exchanging. This way, you are able to qualify for your gain for deferred tax treatment. At the time of selling the property under 1031 property exchange, the gains are not taxed. However, IRS rule should apply, so you need to understand how it works because on particular entities or types of assets can qualify for 1031 exchange benefits.
- Greater Income Potential
If your property sale qualified for 1031 exchange, it increases your potential for attaining more income. For instance, an investor can sell their raw land then use that cash to purchase income generating property. If you have land that is not developed, you could sell so that you invest the money elsewhere. If you decide to purchase property that generates income like rental units, you will have a greater potential for earning more income. All this happens without having to pay tax on the gains you attained after selling the raw land.
- Ability to Change Property Types
Often, you may find that the property you have doesn’t bring you the kind of income you want. You may as well decide to sell that property and purchase another one that probably beings in more income. The 1031 exchanges allow investors to exchange or swap to different kinds of investment real estates. For example, you can switch from land investment to building investment or residential property investment. Similarly, you could switch from residential property investment to commercial property investment. These kinds of exchanges can offer you a good opportunity to explore new areas of earnings and protect your investments.
- Move to New Markets
Sometimes, you find that the current market where your property is located does not fare so well. So you would want to relocate to a different location or state where probably the market is better. With the 1031 exchange, you are able to move your investment into that new market by selling the existing one and using the gains to purchase a new property in another market. This may apply if for instance, you want to move your investments to a new location where you moved or relocated to recently. It may also happen when you identify new opportunities or better market in that new location.
- Consolidating your Properties
Having several properties can be difficult to manage. However, with 1031 exchange, you can exchange those properties for a single property that allows you to easily manage it. This will ensure that you have greater control and management of your new property. You may also find it more profitable if you have one single property investment that performs well that having multiple properties that may it difficult to manage them.
- Ease of Property Management and Obligations
If you find that your current property, for example, a commercial property is difficult to manage, you can exchange it for land. This way, you can easily manage the land investment meaning you have reduced obligations. You can focus on other core business aspects without having to worry much about a commercial real estate property.
Before you decide whether is 1031 exchange right for me, you need to understand the benefits you get from the property exchanges. You also want to learn more about the rules because not all properties are likely to qualify. Also, you cannot just reinvest into any kind of property, you have to follow the guidelines and rules as set under IRS Section 1031 for a 1031 exchange. Otherwise, the benefits are many but the main one is being able to get more cash flows since you defer payment of tax on the property gains arising from every sale you make. If you’re able work through this regulation, you may find that you save a substantial amount of money that you can use to meet other financial obligations.