The Key Benefits Of A 1031 Exchange

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Are you a real estate investor? Well, you’re certainly aware of the benefits of 1031 exchanges, which helps commercial property owners eliminate their capital gains tax burden by reinvesting the revenue from the sale of their premises in purchasing another real estate with similar or identical value. 

This exchange doesn’t apply to residential real estate, solely to commercial properties, allowing owners to find suitable premises that match their investing goals. 

These are the key benefits of 1031 exchanges. 

Tax deferral

Tax deferral is undoubtedly the greatest benefit of utilizing a 1031 exchange, allowing real estate investors to avoid paying capital gains taxes by following particular terms of Section 1031 of the U.S. Internal Revenue Code. As long as you reinvest the sale profit in a like-kind property in the course of a 180-day period, the IRS won’t charge you capital gains tax. Click here to learn more about the rules and regulations of this type of exchange. 

Nevertheless, the like-kind property is expected to be either of equal or higher value in order to comply with the legal requirements of the IRS. Keep in mind that you aren’t supposed to resale nor use the real estate for personal needs, as the exchange would be immediately disqualified. 

In terms of the property exchange opportunities, you’re provided with an extensive variety of exchangeable real estate. For instance, you can easily exchange a residential property for an industrial one, or vacant land for office space. The replacement property has to be identified in the course of a 45-day period, while the exchange should be completed within a period of 180 days. 

In order for the process of estate identification to be properly completed, you are obliged to include both physical and legal description of the real estate, as well as its address in writing. This document is supposed to be signed by you and delivered to a number of people involved in the process, such as the escrow agent, the qualified intermediary, and the seller of the like-kind real estate. 

Additionally, by following the three-property rule, you are allowed to identify no more than three replacement premises, regardless of their market value. In contrast, by following the two hundred percent rule, you aren’t limited in terms of identifying a particular number of like-kind premises but their overall market value isn’t supposed to exceed the total market value of the real estate you’ve sold beforehand.

Greater investment capital

Another incredible benefit of utilizing a 1031 exchange is having more capital to invest in a replacement property. The tax deferral rule of a 1031 exchange provides real estate investors with greater leverage to acquire a high-quality property that promises excellent proceeds. Consequently, you’ll be able to choose a real estate that matches your investing goal while paying no capital gains taxes until the moment you decide to sell the premise. 

In addition, a 1031 exchange provides you with an opportunity to explore thriving real estate markets. There’s no reason to continue investing in family homes if the market of commercial premises is experiencing a boom. 

Wealth accumulation

Wealth accumulation is an indispensable benefit of utilizing the 1031 section in comparison with the conventional selling of properties. Real estate investors aren’t restricted when it comes to the number of times such an exchange is done, hence being provided with an amazing opportunity to accumulate wealth. 

Moreover, the continuous process of performing such processes increases both net worth and cash income while paying no taxes. Some investors even hire on-site managers to help them with the process of management, which might be overwhelming for some owners. 

Minimize depreciation recapture

Depreciation is known to be a method that determines the depreciated value of a property over time, due to the constant wear and tear. This amount is most commonly a part of the taxable income, which results from the sale of your commercial premises. Consequently, the 1031 section will help you minimize the cost of depreciation. Visit the following link, https://www.investopedia.com/terms/d/depreciation.asp, to check out the main features of depreciation. 

Bottom line

Utilizing this section of the Internal Revenue Code will help you defer taxes, have greater investment capital, and accumulate wealth!