Why Just Sell Investment Property When You Can Exchange It With A 1031 Exchange?

By Author: Trisha Coppley
Total Articles: 46
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As an investor, you know that each and every single dollar that you have invested is compounding your wealth, and, conversely, that every dollar not working for you represents a missed opportunity to increase your funds. When it comes time to make a sale on a piece of real estate, you have 2 options. The 1st option that you have at your disposal is simply to make a outright sale and recognize a capital gain. This means that you must pay capital gains taxes . But every time you pay money to the U.S. government you are losing money that could be put back into investment.

Your second, and often more profitable choice is to conduct a 1031 tax exchange. An exchange is a great way to keep more of your investment funds making you money. Section 1031 has a provision of non-recognition, meaning that you don't have to pay the capital gains taxes immediately; in fact, you can defer the taxes for an indefinite time span, while your funds are compounded by the extra income produced by investing your tax deferment.

By way of example, imagine that you own several small investment properties, such as duplexes, whose ...
... values have appreciated over time. At this juncture, your inclination might be to sell these properties up front and reap the benefits of your investments. But a wise investor with an eye to the future might choose to conduct a 1031 exchange and place the money gained from these investment properties towards the purchase of another piece of investment property, which will, itself proceed to appreciate in value over time, meanwhile continuing to make you more money. Additionally, the money at your disposal from your tax deferral will work to heighten your capacity to leverage for greater loans, maximizing 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, in addition to certain types of personal property, from cranes or backhoes to airplanes or classic cars. 1031 exchanges are particularly advantageous for those who have invested their funds in collectibles or antiques such as classic cars, in light higher capital gains tax liability on the sale of these types of items. You cannot, however, exchange things like stock, bonds, or interest in an REIT.

So, next time you are in the position to sell a piece of real estate or other type of investment, pause for a moment and consider the profit you could reap were you to exchange instead. If you choose to perform a 1031 tax exchange instead of selling your property up front, you can maximize your profits and come out ahead in the long term.