As a property investor, it is very important that you explore different avenues to grow your portfolio. One thing that smart real estate investors commonly utilize is a 1031 tax-deferred exchange. This type of transaction allows you to sell a 1031 exchange investment property and use the proceeds for buying like-kind property of similar or greater value while deferring capital gains tax. It is ideal for purchasing higher-value investment properties that generate more return and offers a number of benefits.
This article will highlight outstanding benefits of a 1031 tax-deferred exchange that will make your next property sale more profitable.
One of the biggest benefits of a 1031 exchange is the tax benefit it offers. Tax charged on capital gains from property sale can be very high. For instance, short-term capital gains tax on the sale of a property less than a year in your possession can be as high as 37%, while long-term capital gains for properties you’ve owned for more than a year can range anywhere between 15% to 20%. A 1031 exchange allows you to defer these payable taxes making the entire amount usable.
You can take advantage of the sale of a 1031 exchange investment real estate to acquire a more valuable investment property. By utilizing the proceeds from the sale, including the amount that would have to be paid to the IRS in taxes, you can purchase an investment property that is more valuable in value as the replacement property. This means that it maximizes your buying power, giving you the ability to leverage the proceeds to grow your wealth.
When you sell an investment property, besides hefty capital gains taxes, an accumulated depreciation recapture is also applied. These can be taxed at up to 25% at a federal level, and at varying rates at the state level. With the help of a certified public accountant (CPA), you can use a 1031 exchange to reset the depreciable amount of your property to a higher value that will allow you to get a bigger tax benefit.
Like-kind exchanges in a 1031 exchange aren’t restricted to state lines. This gives you the liberty to manage your investment portfolio, and utilize an innate advantage of real estate investment which is diversification of risk. With a 1031 exchange, you can exit out of a single managed property investment and minimize risk by using the property sale proceeds on multiple investment properties distributed across different real estate markets across various states. In other words, you can sell one high value property, and use the entire amount to buy multiple properties or a single replacement property with significantly higher value.
A tax-deferred 1031 exchange defers capital gain taxes from a property sale allowing you to spend the entire amount to grow your investment portfolio. You can use the process to increase the value of your investment properties by trading up for higher-value real estate properties.
If you’re looking for a certified exchange specialist that can help you with the process, Granite Exchange Services provides a comprehensive service for 1031 exchange. Contact us to learn more about our services and how we can help you.
We are proud to have long-standing relationships with the intermediary community and have a designated team supporting relationships with escrow officers, lawyers, accountants, tax advisors, investment consultants and corporate finance professionals.
