How Property Investors Can Defer Capital Gains Tax By Using Section 1031

As a real estate investor, you must be aware that each and every dollar that you have working for you in an investment is making you money, and, conversely, every dollar that isn't working for you represents a lost opportunity to further compound your profits. So, when the time comes to put your property up for sale, you have two options. The 1st option that you have at your disposal is simply to make a outright sale and recognize a gain. This means you must pay capital gains taxes. Whenever you pay money to the United States government you are losing potential profits.

The second, and often more lucrative option is to conduct a 1031 exchange. A great way to keep more of your investment funds making you more money is to conduct an exchange instead of making an outright sale. Section 1031 has a non-recognition provision, meaning you do not have to pay the taxes immediately; in fact, you can defer the taxes indefinitely, while your wealth is compounded by the extra income produced by investing your tax deferment.

As an example, let's say you own some small investment properties, like duplexes, whose values have increased over time. At this juncture, your first inclination might be to make an outright sale and reap the benefits of your investments. But a wise investor with an eye to the future might decide to conduct a 1031 exchange and place the proceeds from these smaller investment properties towards the purchase of another, larger property, which will, itself go on to appreciate in value over time, meanwhile continuing to make you more money. Additionally, the money available to you from your capital gains deferral will function to increase your ability to leverage for greater loans, maximizing your potential profits.

1031 exchanges aren't just for land and buildings, either. It is possible to make a 1031 exchange on any sort of real estate held for investment in your business or trade, as well as certain kinds of personal property, from cranes or backhoes to an aircraft or collector car. Section 1031 is especially beneficial for those who have money in antiques or collectibles like collector cars, because of the higher capital gains liability on the sale of these items. It is important to note, however, that you cannot make a 1031 exchange on stock, bonds, or interest in an REIT.

So, next time you find that you are planning to sell an appreciated piece of real estate or other property, pause for a moment to think of the future dividends you could reap were you to make an exchange. If you decide to conduct an exchange instead of selling your property up front, you can maximize your wealth and come out on top.