There are many useful benefits of using a 1031 Exchange to your advantage. Who wants to pay more taxes to the government anyways. Take a look at this great list of items you may not have considered before:
The number one reason why we invest in real estate is Appreciation. Whether your asset has increased in value $50,000 or $5,000,000, 1031 Exchanges are a valuable tool to defer Federal and State capital gain taxes. 1031 Exchanges are often considered indefinite. Many savvy investors utilize this section of the tax code to leverage their investments time and time again to defer taxes over extended periods of time.
Standard residential properties can be depreciated over a 27.5 year basis. There are two important factors to consider regarding depreciation. The first pertains to the tax deductions allowed on real property during the first 27.5 years of ownership. Once the property has been fully depreciated, there are no deductions to claim. The second is taxable recapture of the depreciation. If you own an investment property and not taking advantage of an exchange, you may be liable for the recapture of taxes on all depreciation over the life of the property.
3. Cash Flow
Many investors utilize 1031 exchanges to reposition their equity into higher cash flow positions. If your asset is not performing as high as you would like on a cash flow basis, you may consider a similar asset with increased annualized return.
1031 Exchanges are a great opportunity to diversify your portfolio and hedge against risk that comes with owning one or multiple properties in the same investment class. Many investors utilize the opportunity to buy multiple types of properties and/or across several different areas. This includes properties that are out of state.
5. Tax Deferral
A 1031 exchange is a tax deferred exchange, simple as that. By leveraging a 1031 exchange an investor my defer federal and state capital gains and depreciation recapture taxes. Depreciation deductions will also be available if the replacement property is greater in value than the relinquished property.
6. Management Relief
Some investors accumulate several rental properties, which are often dispersed over a large area. Maintenance and management across these properties can be overwhelming and timely. Relief of these headaches may be achieved through exchanging multiple properties for a single apartment complex with a property manager or even a different real estate product.
7. Estate Planning
Converse to the example above, there are situations in which several family members may inherit one large property. In some cases, the family members will disagree on whether or not to keep the investment or to sell the property for cash. When an agreement can’t be made, exchange the one large property into several smaller properties to satisfy each of the family members.
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This publication is not a solicitation of tax or legal advice. If you have tax or legal questions, be sure to consult your attorney. Brad and Lauren Seaman are CA Real Estate Licensees. If your property is currently listed for sale, this is not intended to be a solicitation of your listing.