All real estate investors use a 1031 exchange to avoid taxes, but it has other benefits. Here are the other benefits and 1031 exchange examples you should know.
Buying and selling property in the United States involves more than two agreeing parties, a lump sum, and a handshake. Small businesses and startups breaking into the real estate industry or listing a property for sale do not want to lose out on their profits. One big obstacle in the way of this is the capital gains tax.
The capital gains tax affects the sale of any property outside your main residence. So businesses wanting to move from one location to another need to factor in the fact this tax could take up to 20% of the sale’s profits. Avoiding this costly tax is easier than you think with 1031 exchanges.
Check out this brief introduction to 1031 exchange examples below and how they may benefit you in your next commercial property sale.
1031 Exchange Examples: What are 1031 Exchanges?
Business owners hoping to avoid the expensive capital gains tax should consider performing a 1031 exchange instead. A 1031 tax-deferred exchange allows the seller to defer the capital gains tax by immediately reinvesting into a new one.
The property must be of a similar kind to the first. However, you may invest in more than one property so long as the total sum comes to an amount equal or greater to the sold property.
You must also hire a qualified intermediary to help with this process. You cannot touch the money in between selling the first and buying the new property, so they take care of this.
Technically, you can continue to do exchanges with your properties in order to never pay the capital gains tax.
Why Do a 1031 Exchange? Benefits and Advantages
The main benefit of doing a 1031 exchange may be avoiding the capital gains tax, but there are several other benefits as well. 1031 exchanges work better in some deals than others, so read on to learn the advantages of these exchanges.
Open Up New Markets
The similar property you find does not need to be within the same city, county, or state as the property you want to sell. This means you can relocate your business from an area with few customers to an up-and-coming location with a bigger market.
A Chance to Invest in a Multiple Properties
The “like-kind” rule allows for a little wiggle room, meaning you do not need to buy a single house if you sell a single house. You can sell your rental property in a risky place where you may get lots of money for the sale, but not a lot of money from month to month. Then, invest in a portfolio or collection of rental properties in a less risky area to generate more revenue monthly.
Since there is no limit to how many times you may perform a 1031 exchange, you can build a lot of equity over time.
Trade Up for Higher Returns
Easily trade up to a bigger and better portfolio or property without needing to pay taxes on your new investment–at least until you sell or do another 1031 exchange. This way you gain higher returns without losing money upfront.
Increased Exit Flexibility
Trading your commercial property in for a portfolio of single-family rentals gives you more flexibility to sell parts of the collection at a time. You can sell one home while maintaining the others.
Great Advice for Your Small Business or Startup
These 1031 exchange examples are just the tip of the iceberg when learning insider tricks to make your small business more profitable.
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