Reasons a 1031 Exchange Should be on Your New Year Resolutions List
Buy less coffee. Eat more meals at home. Only make purchases with cash or debit cards. Fiscally responsible New Year’s Resolutions - we have all made these well-intentioned declarations, and maybe stuck to them for a week or two before falling by the wayside. You are already smart and intentional with your money, even if you might stop by Starbucks a bit too often. But what if your New Year’s Resolutions could really make a difference to your financial present and future? You will have to think a little grander than that Grande cup of joe, and have a bit of patience, but 2022 can be the year to start scaling your wealth portfolio - or to at least begin building a strong foundation toward your fiscal goals. If investing in real estate is something that captures your interest, or if you are already vested in property, the 1031 Tax-Deferred Exchange is a growth-oriented tactic that should be on your radar for the year ahead.
Real estate investments can offer exciting dividends. But when you sell a profitable investment property, you are liable for capital gains taxes at the time of sale, which can be a significant sum out of your overall earnings. However, if you participate in a successful 1031 tax exchange, you can avoid immediate payment of these capital gains taxes and instead can make them work towards building your wealth over time.
Also known as a “like-kind” exchange, the 1031 exchange allows real estate investors to defer payment of capital gains taxes if they reinvest the proceeds of one sale into another property or properties of equal or higher value. There are no limits to the amount or frequency of 1031 exchanges you can participate in, so technically you can continue to defer capital gains tax payments while building equity and value in your portfolio as you sell and reinvest in like-kind properties over time. With some planning, you can turn a single-family investment property into a duplex, then a fourplex, then a portfolio of properties, and then perhaps your own real estate empire! As if that is not compelling enough, a 1031 exchange also enables real estate investors to:
Exchange for a higher-value property
Invest in different markets, since like-kind exchanges are not limited within state lines
Invest in a portfolio of rental properties for immediate cash flow by relinquishing a single-family home in a high-value market with several replacement properties in a more affordable area
Enjoy the flexibility to sell portions of your asset portfolio when multiple properties are owned
As you look forward to leaving an inheritance for your loved ones, they can also benefit from your 1031 exchanges, as some tactics and adjustments can be made to potentially eliminate the gains-related taxes, so they can completely enjoy the fruits of your real estate investing.
With so many benefits and potential for growth, a 1031 exchange should definitely be a consideration for real estate investors in 2022. And even if you are not already in the market, this can be the year to jumpstart your empire by purchasing an investment property. One caveat- you will want to talk to a 1031 exchange expert, or qualified intermediary, who knows the requirements and regulations of this complicated (but rewarding!) process. With their help, you can successfully complete 1031 transactions and cross “start growing wealth portfolio” off your New Year’s resolution list!
Our founder has been helping clients strategize and optimize their real estate investments through 1031 Tax-Deferred Exchanges nationwide for over 20 years. We are committed to helping our clients pursue and realize their financial goals. If you have any questions about 1031 Tax Exchanges, or are ready to take the first step, please visit our website or reach out to us at megan@sces1031.com or 805-738-2599. We look forward to hearing from you!