Selling a property and wanting to avoid the taxes that will encroach as you reinvest the gains on a different one? There’s a way to go around this puddle without getting your feet wet, so to speak. And no, it isn’t a loophole. It’s an actual section you can find in the country’s IRS code— a 1031 exchange.
What, then, are the benefits of a 1031 exchange?
1031 Exchange: What Can You Get Out Of It?
Being an investor in real estate has become a very lucrative business. The age-old buy-and-sell scheme is now a solid business that anyone from any background can get into. If you have the cash and the connections, you’ll glide right through with ease.
Only, there are a few speed bumps that can slow you down. Among them are tax liabilities. Tax liabilities where a part of your capital gains (basically, your profit), will automatically be the IRS’s. And that amount will be a percentage taken based on your total capital gains.
But there IS a way to avoid all of this. In legal terms, it’s deferring. You can defer said taxes so that you can pocket the entirety of your profits. Although there are needles to pass through and specific situations that can be considered for such deferments, we’ll talk about those on another post and focus on the advantages.
1. Deferred Taxes
Plain and simple. To taxes to be taken out of your capital gains. If you compute that and compute it for long-term, you’ll easily be saving a lot. And that’s an understatement. By a lot, that could potentially be in the thousands.
This is going to be especially helpful if you plan to continue to trade up property sale after property sale. In doing so, cash will continually flow with you getting all of it without any deductions.
2. Diversity Of Property Investments
Instead of being stuck to single property investments out of worry that if you diversify, you’ll be losing more in tax deductions, worry no more! You can open up your portfolio and broaden it with peace of mind.
Grow your business and be at east as you continue to pour out in property investments whenever you wish to. After selling one and you’re ready to eye multiple sets of real estate, you can do so without being held by tax liabilities.
3. Transferring Assets You Find Unprofitable
Thirdly, you’ll be able to get rid of undesirable assets without losing out in the end. They’re already unprofitable as they are— properties that are just too overpriced or are not getting enough attention from potential buyers.
As opposed to being glued to these without a way out, you can take advantage of this method of ridding yourself of these without having to shell out in taxes in return.
As mentioned earlier, you will have no challenges repeating the process several times with deferred taxes. Selling and reselling, then investing and reinvesting in many other real estates, you can enjoy reaping the rewards without backslashes of tax cuts from your capital gains.