Many people underestimate the benefits that come with taking part in a 1031 property exchange. By deferring taxes on capital gain, you can use the money to grow your property holding and diversify your interests.
If you like the idea of getting the government to fund your commercial real estate venture, then you’re the perfect candidate for a 1031 tax-deferred exchange. Surprising as it might seem, the federal government wants you to succeed in commercial real estate. The population is growing at an unprecedented rate, calling for more dwellings and commercial spaces.
To ensure that demand doesn’t outstrip supply, the IRS makes a tax concession for people helping to solve this problem. With proper execution, you go about your days without paying a penny in capital gains to the government.
Defer Your Taxes Forever
Section 1031 of the Tax Code allows you to hang on to your capital gains after selling commercial property. Well, that is if you plow the entire sum from the sales proceeds back into the sector.
Any way you look at it, deferring the capital gains tax works to your advantage. Say you want to sell a property worth $3 million that you bought for $500,000 20 years ago. You get to keep the entire profit of $4.5 million and not pay a dime to the government. Your total purse for the next acquisition will now be a healthy $5 million, meaning that you can go after an equally prime replacement property.
As part of the property swap, you’re not allowed to handle not even a dime from the sales as that will nullify the tax advantages. The process revolves around delayed gratitude, and your patience will be richly rewarded. With $5 million, the process gives you the latitude of buying replacement properties valued at $10 million. That’s right. You can purchase properties of up to twice the value of your current property.
You have the liberty of buying more than one replacement property. Other than the price limitation, you can buy any commercial building that you come across anywhere in the country. That means you can spread the properties all over the country and take advantage of different markets.
Diversify Your Portfolio
As if it’s not enough to have properties spread across major cities, the property swaps overflow with gifts. You can cover your replacement properties across different sectors. That means you can buy a block of apartments in one state, an office block in another, a ranch in another, and a warehouse in a sea city.
Such a diversified portfolio lets you minimize your risks while growing your rental income. Now, if you hold on to these properties your entire life, you can skip on all the capital gains you have accrued. Instead of paying the money to the government, you get to pass it to your heirs.
If you hold on to a 1031 exchange property until you die, the deferred tax advantages pass on to your heirs. In addition to having the government help fund your venture, you let your family keep all the monies made from the properties. It makes an incredible way to grow your real estate portfolio.