Reasons to Consider a 1031 Exchange

It’s springtime, which means the weather is warming up, and the real estate market is too. It is the time of year when people are starting to make their moves, buying and selling homes so their families can be settled in new places when the next school year gets underway. If you are a real estate investor, you are always paying attention to the market, but a seasonal increase in inventory means the opportunity is ripe for growth- and a 1031 exchange may be just the strategy for you.

First… What is a 1031 Exchange?

Also known as a like-kind exchange, a 1031 exchange is an IRS-authorized strategy for real estate investors to defer payment of capital gains taxes from the sale of one property by investing those profits into another ‘like-kind’ property.

And Why Should I Consider a 1031 Exchange?

If you are looking to increase your wealth, a 1031 like-kind exchange is a smart tactic. As a property seller, you could be liable for immediate payment of capital gains taxes of up to 40%. But in this type of real estate swap, you can avoid paying capital gains taxes up front, and instead put that money into the down payment of your new property.

It’s immediately more cash in your pocket providing the opportunity to secure a replacement property that works towards your personal investment goals. This could be something with better cash flow, less hands-on management, or even in a more desirable location.

Changing the location of your property can be a key growth strategy within a 1031 exchange. If you have a real estate investment in a hot market, you can sell and invest into a property in an up-and-coming market, increasing your potential profits with a larger stake in a growingly desirable area.

As long as it is an investment property or land, as opposed to a primary residence, a 1031 exchange can help build the rungs of a ladder into your own real-estate empire. A single-family rental can be exchanged for a duplex, which can then be exchanged for a small apartment complex, which can then be exchanged for an office building and so on.

Of course, owning a real estate empire may take some patience, but another benefit of a 1031 like-kind exchange is that there is no limit to the number of times one can occur. This means that as a real estate investor, you can continue to roll one profit into another and another, continuing to defer payment of capital gains taxes until you eventually sell for cash.

AND… even when your profits are ultimately realized and in-hand, you will ideally only be liable for one tax at a long-term capital gains rate depending on your income level.

I’m In… Now What?

If you are interested in becoming a real estate mogul, or even just optimizing your real estate investments, then you will want to work with a qualified intermediary to complete a 1031 exchange successfully. The process entails strict rules, regulations and timelines that must be adhered to, or the investor can become liable for payment of capital gains taxes.

As a wealth-growth strategy, the 1031 exchange is a smart one that keeps your money vested and working for you as you continue to build your empire. And with the markets heating up and more inventory becoming available, your opportunity is knocking… now.

Southern California Exchange Services has years of experience helping clients strategize and optimize their real estate investments through 1031 Tax-Deferred Exchanges nationwide. We are committed to helping our clients pursue and realize their financial goals and are ready to help you, too! If you have any questions about the 1031 Tax Exchange, or are ready to take the first step, please visit our website or reach out to us at megan@sces1031.com or 805-738-2599. We look forward to hearing from you!