As an investor, you must be aware that single dollar that you have working for you is making you money, and, conversely, that each and every dollar not working for you represents a lost opportunity to compound your wealth. So, when the time comes to make a sale on a piece of property, you have 2 choices. The 1st option that you have at your disposal is to make a outright sale and recognize the profits as a capital gain. Accepting this liability means that you'll have to pay capital gains taxes . Whenever you had money over to the U.S. government you are throwing away money that could be put back into investment.
The second, and often more profitable option is to make a 1031 tax exchange. An exchange is a great way to keep more of your investment funds working for you. Section 1031 has a provision of non-recognition, meaning that you don't have to pay the capital gains taxes immediately following your sale; in fact, you can defer the taxes indefinitely, while your money is compounded by the extra income produced by investing your tax deferment.
By way of example, let's say that you are the owner of several small investment properties, like duplexes or triplexes, whose values have appreciated over time. At this juncture, your instinct might be to make an outright sale and reap the benefits of your investments. A wise investor, however, might decide to make a 1031 exchange and place the proceeds from these investment properties towards the purchase of another property, which will, itself go on to increase in worth over time, meanwhile continuing to increase your wealth. Best of all, the extra money at your disposal as a result of deferring capital gains taxes will function to heighten your ability to leverage for greater loans, building up your potential profits.
1031 exchanges are not limited to just land and buildings, either. You can conduct a 1031 exchange on any real estate held for investment in your business or trade, and certain kinds of personal property as well, from a backhoe or crane to an aircraft or collector car. As a matter of fact, 1031 exchanges are especially advantageous to those who have invested in antiques or collectibles such as classic cars, because of the greater capital gains tax liability on the sale of these types of items. You cannot, however, exchange things like stock, bonds, or interest gained from an REIT.
Next time you are in the position to sell a piece of real estate or other type of investment property, take a moment to consider the dividends you could reap were you to make an exchange. If you decide to perform an exchange rather than selling your property outright, you can maximize your profits and come out ahead in the long term.
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