3 Significant Benefits of Using 1031 Exchange

In real estate, the capital gains taxes of an appreciated property sale can amount to as much as one-fourth of the total profit. Fortunately for real estate investors, a 1031 exchange enables the taxable amount to be deferred by using the proceeds of the exchange for reinvestment on ‘like-kind’ assets during a given time. This procedure has multiple benefits for the investor which include:


# Resetting Depreciation

Real estate wears down over time. Knowing this, the IRS allows property owners to claim depreciation as an expense and avail deductions while declaring taxes for their monthly rental income. On the other hand, if the owner sells the property at an appreciated price, a figure as high as 25% of the total profit has to be paid as capital gains tax. Using a 1031 exchange, the depreciation can be rolled over into the ‘like-kind’ replacement assets and is deferred until the time those assets are sold. 


# Increasing Investment Capacity 

By deferring the capital gains tax, you increase your investment capacity for other, more valuable assets. Using the proceeds of the exchange as capital, you can make investments in more expensive replacement assets. 


# Diversification of Portfolio

A common strategy for reducing risk in investment is the diversification of portfolios. By using the proceeds of the exchange to invest in multiple assets, you can diversify your investment. Even if assets of a certain class do not perform well and turn profits, your other investment assets will keep your finance safe and afloat. 

   

# Consolidation of Assets

In contrast to the previous point, if an investor finds that owning and managing multiple investment assets is trouble and time-consuming, a 1031 exchange allows the investor to sell the assets and use the profit for investing in a property that requires less maintenance.


Conclusion  

A 1031 exchange allows an investor to defer the capital gains tax of a property sale along with the profit to be used for reinvestment in assets of a similar class. As mentioned above, this has many benefits that add to the security of an investor’s portfolio. To facilitate 1031 exchange capital gains, an investor needs the service of a fully qualified intermediary accommodator. Full Service 1031 can provide you with all the assistance and service you need to defer your capital gains taxes from your property sale. To learn more about their expertise and services, visit their website.


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