Taxes: They play an important role in any investment and are always a major consideration for any individual doing business in a particular location. That is why in the field of real estate investment, the 1031 Tax-Differred Exchange is a very attractive option for any real estate investor.
A 1031 Exchange is a provision of the IRS code that allows any taxpayer to defer the tax consequence of the sale of a property as long as they exchange an investment property for a similar one that is used for business or investment purposes. It takes its name from the particular section of the code that states that “no gain or loss shall be recognized in the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged only for property of the same kind , held for productive use in a trade or business or for investment”.
Many real estate investors view this provision as a smart tax strategy and investment option. They view the 1031 Exchange as a vital part of estate planning since, in theory, a 1031 Exchange defers any capital gains on an investment property for as long as the taxpayer is alive. Capital gains taxes bite into a large part of the money that investors prefer to use for other future investments. Capital gains are between 15 and 30 percent of the total purchase price, with state and federal taxes combined. Therefore, investors opt for a 1031 exchange to avoid a loss of money, the same money that can very well be used in other types of investments.
Thus, an apartment building can be exchanged for a series of commercial spaces, while an office building can be exchanged for land to be developed for investment purposes. Every investor has the advantage and power to build and preserve wealth and assets as they generate cash flow from their investments. The 1031 Exchange remains one of the most powerful wealth-building tools for any taxpayer, as long as they intend to reinvest the proceeds into more investment property. Financial wizards, gurus and businessmen consider it an important option to build their success strategy.
