As a real estate investor, you understand the importance of growing the value of your investments over time. The purpose of working in the real estate business is, after all, to make a profit in the end – so it’s important that you structure your business in such a way that allows you to profit from your hard work and careful planning. One of the best tools for today’s real estate investor, then, is the 1031 tax exchange.
The 1031 tax exchange is related to one simple principle: finding a process by which you are able to grow the total value of your held investments at a steady rate and without losing ground by paying taxes. Consider the typical investor’s conundrum: I have a property that I purchased 10 years ago for $100,000. Today, that property has grown in value – and is now worth $150,000. I’d like to sell that property and purchase something else across town. I’ve identified a new property that looks like a better investment for the long term – and it costs $150,000. Perfect. Unfortunately, however, there is no way for me to walk away from the sale of my first property with $150,000. The increase in value of property that I hold for investment is taxed as a capital gain – so my planned $150,000 might quickly shrink to $130,000. NOW how am I going to buy that great property across town that costs $150,000?
The above example is a simple approximation that does not take into account exact figures or closing costs – but it does serve to outline a common problem among real estate investors: how can you maintain the value of your holdings through subsequent sales and purchases?
The 1031 tax exchange process is specifically designed to allow real estate investors to defer payment of the capital gains tax during the time that they are actively involved in the real estate investment market. Successful 1031 exchangers follow a set of government tax guidelines that allow them to sell a property at its appreciated value without immediately paying taxes. The offshoot of this is that 1031 tax exchangers are able to maintain the value of their investments (by avoiding immediate taxes) over time. 1031 exchangers have more money to invest in new ventures in the short-term in exchange for paying accumulated taxes at a later date.
Smart use of the 1031 exchange process, then, is a critical skill for any individual hoping to make a profit in the real estate investment market. Learning the ins and outs of 1031 exchanges is a smart way to boost your bottom line and ensure that you are able to make the most of the time and energy you invest into your real estate business.
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