Real estate investment is one of the most popular forms of investment in 2022, remaining one of the most competitive forms of investment to enter with a high yield of return. Generally, real estate and home prices beat the rate of inflation, as well as perform better (and faster) than any stock market assets you may retain. There’s no end in sight either, as the market for homes is expected to remain in shortage for quite some time, especially in high trafficked and popular areas. Selling your real estate investments and reinvesting is an opportunity for additional gain, and also where 1031 Exchanges can help. Below, we discuss what a 1031 Exchange is, its benefits, and additional resources for your tax-free wealth-building journey.
What is a 1031 Exchange?
A 1031 Exchange is a deferred tax exchange that is designed to help investors such as yourself access higher-level investment properties after a sale. According to the Federal Tax Code, you are able to defer Federal Gains Tax on the sale of a property, as well as certain federal income liabilities. You will then have the opportunity to put the funds toward a higher value property rather than paying the taxation rate. There is a certain timeframe that you must do this depending on your investment situation, which is why you should consult a tax specialist for more information if you plan to take advantage of this benefit.
To claim a 1031 Exchange on your taxes, Form 8824 must be completed and filed with your Federal exchange. Your tax specialist can assist you with this process and ensure that all documentation is filed and going to the right place.
Is a 1031 Exchange worth it?
Yes, many investors feel that a 1031 Exchange is an efficient tax opportunity to save them from paying higher taxes and fees after a sale.
Benefits of a 1031 Exchange
There are many benefits to a 1031 Exchange. We’ve outlined a few of the top ones to consider below:
1. Receive Management assistance for multi-property investors
If you’re an investor who holds multiple properties, you understand how time-intensive maintenance can be. With a 1031 Exchange, you can use your funds to invest in larger-scale properties with more centralized care and maintenance needs, such as apartment complexes. This is more efficient over time than maintaining a portfolio of many small or low-value properties.
2. Enhance fluid cash flow for other investments
Rather than paying a higher taxation rate, you can simply reinvest the funds and purchase a higher-value place for less cost paid upfront than you may otherwise have.
3. Enjoy less potential depreciation capture over time
When you take advantage of this type of deferral, there is less of a chance that you will have to undergo major depreciation capture over time. This results in less depreciation being included in the overall sale of the property.
Looking for ways to go from high income to high net worth? The experts at Money Insights are here to help. For more information, and to access our free tax-free wealth-building resources, contact us today at (801)-642-4924.