What is a 1031 Exchange?
The IRS allows real estate investors to delay or defer capital gains taxes on the sale of an investment property through a 1031 exchange. The person who sells a property has 180 days to use the entire proceeds of that property to purchase a “like kind” of property that is equal or greater in value of the property sold.
Is it worth it?
Yes, a 1031 exchange is absolutely worth it for a number of reasons. First, you can leverage more money into buying a more expensive property. Instead of paying 20% in taxes, that money can go directly into the purchase of the new property. Second, the investor can diversify his/her portfolio. He/she can buy multiple and different kinds of investment properties through the 1031 exchange. Third, the real estate investor can increase cash flow. For example, a 4-unit apartment complex with marginal cash flow can be turned into a triple net lease property with much better cash flow.
Real life example:
We had a client that bought a vacant parcel of land for $375,000 on the outskirts of Huntsville, Alabama. As the city began to grow, his land became very valuable. He wanted to sell it, avoid taxes, and buy something that would yield good cash flow. We advised him to sell it, and go through a 1031 exchange. Our client listened to our advice, and sold his vacant land for about $2,500,000. With the proceeds, this investor purchased a chipotle in Alabama that netted him $118,750 a year in annual rent. His cash flow grew exponentially while avoiding capital gains taxes. If our client didn’t purchase the Chipotle, he would have owed $428,125 in capital gains taxes.
-Visit our 1031 Exchange page for more information on exchange rules and regulations