There are a number of reasons you may be done with your investment property–you’ve had it so long that there’s no depreciation left, the neighborhood has changed and your tenants just aren’t what you used to have, or you simply think you could be generating more cash with a different property–the list goes on. If you are saddled with an investment property and feel that it’s time to trade up, it could be helpful to know about 1031 Exchanges. A 1031 Exchange allows an investor to sell a property and then reinvest the proceeds in a new property all while deferring your capital gains taxes. The benefits of a 1031 Exchange are plentiful–read on to learn why this is a smart move!
A 1031 exchange offers leverage. An investor can use the money that he or she would have paid to the IRS for the realized capital gains to fund a heftier down payment. As a result, investors can increase their buying power and purchase a pricier replacement property, eventually growing their long term wealth! (Several years ago I sold a condo at just the right time and was able to buy a small apartment building with the tax deferred profit from the condo sale. Color me happy!)
You can also exchange a headache property like a condo in Gaithersburg with a difficult tenant for a beautiful condo at the beach that you rent through the summer months and you visit (in accordance with the tax laws). The tax code can actually work to your benefit, your bank account – and your sense of enjoyment.
A 1031 can also result in greater cash flow if used strategically. For example, an investor can unload a vacant house in exchange for a money generating property such as retail space. You will be surprised what the IRS allows as a “like kind exchange.”
Bottom line: a 1031 means greater flexibility for the investor (the exchange makes it easier to get rid of properties that aren’t generating cash) along with greater purchasing power (because less money going to taxes means more money for a down payment!)
For information on how a 1031 can address your specific needs, PLEASE talk to your accountant to find out what steps you need to follow when you sell your current cash nightmare (old investment property) and buy that new cash cow! And, as always, give Lise a call at 240-401-5577 if you’re ready to sell or to start the hunt for a better investment! If you don’t have a good accountant and a tax free exchange facilitator, you can rely on the fact that I have all those resources. Give me a call and lets get going!
This blog is not intended as tax advice. Please consult your tax advisor regarding any questions about compliance with or potential benefits of the IRS tax code.