1031 Exchange: Defer Your Real Estate Taxes
You've heard the term 1031 exchange but was not sure what it means. Let me give you an example of its power first and then I'll explain what it is required afterwards. Let me also disclose now I'm not a real estate attorney or 1031 exchange company so don't quote me but I want to give you a general idea because this is an incredible vehicle for wealth creation.
Ok let's say you purchase a piece of investment real estate for $500,000 with $100,000 down while financing the remaining $400,000. Let's next year there is word that a massive and popular mall is going to be built next door and your investment piece of real estate value just doubled to $1,000,000. You want to sell and capture the profit but you don't want to pay the $500,000 tax gain associated with the sale. You decide I want to exchange this property for a larger property and roll over my profits into the new investment real estate. You then sell the investment real estate for $1,000,000 pay off the lender you owe $400,000 too and then put the $600,000 into a 1031 exchange company who specializes in holding funds for the purposes of completing a 1031 exchange. Then three months later you find the perfect exchange property and you purchase an investment real estate property for $1,000,000 putting the $600,000 down and getting another loan for $400,000. Now you've just increased your equity and most likely cash flow from $100,000 to $600,000 without having to pay taxes on the gain. Simply, rinse and repeat and you'll be the 1% eventually. You can start simply by buying one rental property and then taking your gain exchanging it for two rental properties. This strategy is meant for a long term investor. There are lots of options but just make sure to properly check the rules on the the IRS website regarding 1031 exchanges.
Some General Rules As It Relates to 1031 Exchanges:
- Once you sell you will need to purchase within a period of time
- You have a certain period of time to identify suitable exchange properties
- The total value of the exchange property cannot be more than 200% of the value of the property you sold.
- There are no extensions for the time periods
- After identifying the property for the exchange you have 180 days to complete the exchange.
- Seek out professional such as CPA's, 1031 Exchange Companies, and or Real Estate Attorney's to assist you in your exchange.
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