For real estate investors, a 1031 tax exchange offers a strategic advantage by allowing the deferment of capital gains taxes when exchanging qualifying properties. This mechanism can significantly aid in portfolio growth and diversification without the immediate tax expense.

With that in mind, we’re sharing an overview of 1031 exchanges and their benefits.

HOW IT WORKS

A 1031 exchange is a tax break for someone selling a property and immediately buying a similar one. Both properties must be alike in type, not necessarily identical in quality or use. The exchange does need to meet criteria, like using a qualified intermediary and identifying replacements in time.

THE BENEFITS

Tax deferral – Investors can delay capital gains tax, keeping investment capital in the new property.

Portfolio diversification – This strategy lets investors swap properties in different places/ classes, cutting risks and boosting long-term potential.

Wealth accumulation – Delaying taxes lets investors buy pricier replacement properties, leading to substantial wealth growth and higher cash flow.

Estate planning advantages – Repeated exchanges defer lifelong taxes. Property passed to heirs could skip capital gains tax with basis step-up.

SOMETHING TO NOTE

While a 1031 exchange allows for the deferral of capital gains taxes, it does not provide a permanent tax exemption.

If you have legal questions about taxes contact us today to speak with an attorney, or feel free to contact us through our contact page at ravosalaw.com.

This is only intended to be information and does not constitute legal advice, nor does it create any attorney-client relationship with the firm.