How Property Investors are Able to Defer Capital Gains Tax Through the Use of Section 1031
If you are one real estate investor, you must know that every dollar that you have working for your investment is actually making you money and every dollar which is not working for you is going to represent that lost opportunity that further compound the profits. If the time comes that you are going to put the property up for sale, then you will have two options. The first option that you will have is to make a sale and get a profit. This means that you should pay those capital gains taxes. When you would pay money to the US government, you are going to lose potential profits or gains.
Another great thing that you will be able to make is the 1031 exchange. Another excellent way that you can keep more of your investment funds to make more money is to get an exchange rather than make an outright sale. Section 1031 comes with that non-recognition provision and what this means is that you don’t need to pay the taxes at once. As a matter of fact, you may defer the taxes indefinitely while your wealth is being compounded by the extra income which is produced through investing the tax deferment.
What this means is that if you own some small investment properties such as duplexes, the values would have increased overtime. Through this, the first thing that you might make is to have an outright sale and you can have the benefits of your investments. But, a wise investor who has that eye to the future might make a decision to have a 1031 exchange and place the proceeds from the smaller investment properties towards the purchase of a bigger property that will itself go on to increase in value over time. Through this, you can still make money. In addition, the money which is available to you from the capital gains deferral will function to increase the ability to leverage for bigger loans and maximize the potential profits.
Know that the 1031 exchanges aren’t just for the land and buildings. It is really possible that you make that 1031 exchange on any kind of real estate which is held for the investment in the business or trade and also certain types of personal property from the cranes and backhoes to aircraft or collector car. You should keep in mind that section 1031 is great for people who have the money in collectibles and antiques such as the collector cars because of the higher capital gains liability if the items are sold. You need to remember that you won’t be able to make 1031 exchange on the bonds, stocks and the interest in the REIT.
The next time that you would plan to sell such appreciated piece of real estate or a different property, you must pause for a moment and think of the future dividends that you could have when you make an exchange. You can maximize wealth when you decide to do an exchange instead of sell the property upfront.