Imagine being able to swap your investment property for another real estate while deferring the capital gains taxes. Of course, the 1031 tax-deferred exchange is one such policy. Some real estate investors consider this a great opportunity to make a profitable sale. 

However, you have to ensure reinvestment of the same sales proceeds for your new investment property. It is a tax strategy that lets you purchase like-kind real estate from previous personal property. 

Moreover, this strategy allows first-time investors to achieve financial freedom and empowerment in the industry. According to a report, the economic benefit gained from the 1031 exchange was almost USD 97.4 billion in 2021. 

Do you want to know the benefits of 1031 exchange properties? Then, read on.

#1. Tax Deferral and Depreciation Benefits

Did you know that most investors rely on 1031 exchange properties because of the tax deferral? This policy allows you to exchange your previous property for a new one without paying the capital gains tax. 

You can also avoid paying taxes on recaptured depreciation accumulated upon purchase. As a result, you reduce the income tax amounts and reset the depreciation of your old real estate. For example, you do not need to compensate for the aging or structural wear and tear of the previous property. 

According to Realty Mogul, you reinvest the proceeds from the sale of your previous property into an equal or greater value asset. However, you need to do this within 180 days of acquisition. 

#2. Diversification of Your Portfolio 

There is no limit to the type of reinvestment based on geography or physical assets in a 1031 exchange. For example, if you want to invest in real estate outside your state lines, the 1031 benefit allows you to do that. It means you can reinvest in a market that has growing potential. 

You get to capitalize and gain the best property investment advantages. Hence, it enhances the risk factor while diversifying your investment portfolio. The 1031 exchange will help you invest in an up-and-coming market for bigger returns in the future. 

Moreover, you generate significant passive income by professionally managing your real estate portfolio acquired by the 1031 exchange. Now, if you invest in a high-value property, that will skyrocket your value propositions and ROI rate. 

#3. Trading up to High-Value Properties 

During this 1031 exchange process, you get to leverage the pre-tax dollars to substantially increase your purchasing power. That means you can get approval to buy a higher-value property which helps enhance your tax strategies and portfolio. 

Due to the deferred exchange, you can trade up to a higher-value property or invest in various properties having higher returns. Hence, investors with a high-value investing goal will find properties that better match their requirements. You can double your investment property cash flow with this exchange. 

Imagine, you own a single commercial property and you want to sell it off. With a 1031 exchange, you can invest in a larger portfolio of rental homes. Similarly, your transaction specifics can determine designated inheritors of the property which will save taxes. 

Things to Do When Choosing a 1031 Benefit

Did you know the 1031 exchange gets its name from the Internal Revenue Code’s (IRC) Section 1031? It is referred to as the like-kind or Straker exchange policy. You might be intrigued by the benefits, but you should do the following before choosing a 1031 exchange: 

• Understand the rules about the 1031 exchange timeline and identify eligible replacement property
• Being proactive about how the exchange calculations work during the sale or exchange of your property 
• Details about the taxable withdrawals, level of replacement leverage, and the role of “boot” 
• Go over the 45-180 day timeline for the exchange from the closing date, research, and investment 
• Determine if your property holdings are income-producing to qualify for the exchange 

Furthermore, you should determine your future goals and focus on achieving them with a 1031 exchange. Ensure that you are not utilizing this benefit to avoid tax bills. 

You should take help from a Qualified Intermediary (QI). They will help you to sell your existing property and identify a new investment opportunity. Once you acquire the replacement a QI will assist you with the yearly exchange reports. 

The Bottom Line

The 1031 exchange will help you gain immense benefits. For example, you can defer capital gains taxes based on your investment amount. Moreover, you can diversify your portfolio and get exposed to new market trends. 

It can also help reset any property depreciation. As a result, you can trade up to a high-value property with your investments. 

Investing in the 1031 tax benefit allows you to secure a cash flow stream, gain management relief, and invest in consolidated real-estate assets. However, before choosing a policy ensure to check the details properly, focus on future goals, and be proactive.