1031 tax deferred exchanges

1031 tax deferred exchanges are one of the greatest tools for the real estate investor. You as a real estate investor are exposed to capital gains tax when you sell a property. There is a way to defer the taxes by structuring an exchange.

It is a common misconception that you have to do a direct trade with another owner. You can sell your property, under certain restrictions and deposit the money with a qualified intermediary. You can then go purchase another property and defer the taxes until you sell the next property. You can continue this process, under certain restrictions, until you actually receive cash from the sale of the property.

I am not an attorney and I do not claim to be an expert on 1031 tax deferred exchanges. This is just a heads up to make you aware that 1031 tax deferred exchanges exist.

You need to own the properties for a while, typically 18 months but that is not set in stone. The key is that the property was purchased and held as an investment. You must exchange like kind property. You can exchange a rental house for land to build another rental house. You can exchange a business for another business. Please consult qualified people and don’t go do a 1031 exchange based on my few paragraphs.

Now you are going to ask, what is the advantage of a 1031 tax deferred exchange? I will let you do the math. Sell a 100,000 rental property and lets just say the capital gains tax was 30%. You get $70,000 to put towards your next purchase. Do a tax deferred exchange and put the entire $100,000 towards the next property. Do this every couple of years and you will gain a huge amount of equity over someone that pays capital gains.

Please note that you still owe taxes, you just put off paying them and get to maximize your investments until you eventually cash out.

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