Who likes paying taxes? Nobody!
A 1031 exchange can help you pay less in tax and make more money. That’s the goal isn’t it?
A 1031 exchange is a swap of one investment property for another. Keep in mind that the properties have to be like-kind, meaning you can’t swap a piece of real estate for a stock. And, the property you are swapping has to be of greater value than your current property.
Now, why would you want to swap an investment property?
Imagine that you bought an income property for $500,000 and rented it out. 10 years later you decide you want to sell the property. You’ve been happy with the results, steady cash flow year after year, depreciation deductions, and the property has appreciated in value from $500,000 to $1,000,000.
You could sell the property and make $500,000 in capital gains, BUT this would be subject to capital gains tax, which can be expensive. This is where a 1031 exchange becomes useful. Instead of selling the property, you just swap your property for a new investment property that is like-kind and $1,000,000 or more, and by doing so you now don’t have to pay any tax and you can use the money that you saved to invest in a new property.
This new property may have increased cash flow, increased depreciation deductions, and will appreciate over time. BUT, the best part is, YOU DON”T HAVE TO PAY ANY TAX NOW!
1031’s are complicated and require professional advice, but this is the overview of how they work in YOUR favor.
Cheers to making more money and paying less in tax!
We hope this helps. Feel free to reach out with any questions.