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Property Investors - Why Sell Your Property Outright When You Can Make A 1031 Tax Exchange?

As an investor, you know that each and every dollar that you have invested is compounding your wealth, and, conversely, every dollar not working for you represents a lost opportunity to further increase your profits. When the time comes to make a sale on a piece of real estate, you have 2 choices. The 1st way in which you can cash in on a piece of property's appreciated value is to make a outright sale and recognize the profits as a capital gain. Accepting this liability means you must pay capital gains taxes on the proceeds. Whenever you had money over to the U.S. government in the form of taxes, you are throwing away potential profits.

Your second, more lucrative option is to make a 1031 tax exchange. A great way to keep more of your investment funds making you more money is to perform a 1031 tax exchange instead of making an outright sale. A 1031 exchange has a non-recognition provision; this means you do not have to pay the capital gains taxes immediately; as a matter of fact, you can defer the taxes for an indefinite time span, while your funds are compounded by the extra income produced by investing your tax deferment.

As an example, let's say you own some small investment properties, such as duplexes, whose values have appreciated during the time you have owned them. At this point, your first inclination may be to make an outright sale and reap the benefits of your investments. A wise investor, however, might decide to make a 1031 exchange and put the money gained from these investment properties towards the purchase of another, larger piece of investment property, which will, itself go on to increase in worth over time, meanwhile continuing to make you more money. Additionally, the extra funds at your disposal from your capital gains deferral will function to increase your capacity to leverage for greater loans, maximizing your future profits.

1031 exchanges are not limited to just buildings and land, either. It is possible to conduct a 1031 exchange on any type of real estate you are holding for investment in a trade or business, as well as some kinds of personal property, from cranes or backhoes to airplanes or classic cars. In fact, Section 1031 is particularly beneficial for those who have money in collectibles or antiques such as classic cars, in light higher capital gains tax liability on the sale of these types of items. It is important to note, however, that you cannot make a 1031 exchange on stockor interest in a Real Estate Investment Trust.

Next time you find that you are in the position to sell an appreciated piece of real estate or other investment, pause for a moment to consider the profit you could reap were you to make an exchange instead. If you decide to make a 1031 tax exchange instead of selling outright, you can compound your profits over time and come out on top .

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