If your investment strategy in the real estate sector doesn’t involve taking advantage of a 1031 tax exchange, you’re leaving money on the table. In this capital-intensive sector, you need a cheap source of financing when planning your next buy.
It might come as a surprise, but the Internal Revenue Service has your back as far as cheap financing goes. The government is happy to help you grow your investment portfolio. Well, that is if you can help them increase the number of commercial buildings in the country.
Keep Your Capital Gains
While this might seem too good to be true, it’s perfectly legal, as there’s a provision in Section 1031 of the Tax Code that allows you to do so. Ordinarily, capital gains taxes can be as high as 43.4 percent when selling a property. Under the property exchange program, you get to keep all the money from the sale.
The IRS can’t allow you to have all the fun, so there’s a catch: you must reinvest the entire amount. If you sold one commercial property for a million dollars, you must buy commercial properties of an amount greater than or equal to one million dollars.
Grow Your Property Portfolio
Real estate property markets are not equal, with some being more expensive than others. With the said million dollars, you have the opportunity to diversify your investment. You might buy a condo for the full amount or opt for five rental homes valued at $200,000 each.
With the latter move, you get to diversify your investment and spread your risk. Section 1031 lets you exchange one property for multiple properties as long as the value doesn’t exceed 200 percent of your property.
Taking part in a 1031 property exchange is an excellent way to gain an edge in the property market. Deferring capital gains leaves you with deeper pockets when buying a new property.