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Benefits of a 1031 Exchange

Any serious study of home ownership will show that it’s a great investment and generally beats renting by comparison. Among the various reasons in support of owning vs renting is the generous tax benefits afforded to home owners. For comparison, when a stock is sold, a capital gains tax is assessed, even if the proceeds are used to buy another stock, or the exact same stock. This article will explore the benefits of a 1031 exchange.

Favorable Tax Treatment

In large part, real estate is a great investment tool because it provides a steady, monthly cash flow. Rates have remained relatively low and steady.

The beneficial tax structure of real estate investing is a big reason why it’s so popular.

Contrary to the stock example above, real estate allows for tax-free growth in certain instances.

Provided the investment is legal and ethical, it stands to reason that anyone would want the most return for his/her investment and with the fewest restrictions possible.

Basics of a 1031 Exchange

A 1031 exchange is an investment property that’s also known as a like-kind property. Simply put, this means exchanging one investment property for another.

Using a 1031 exchange, an investor can sell one investment property then buys another, paying no tax on any profit.

When the property is sold, the proceeds must go into another qualified property. This can be simultaneously at closing, after the sale of a property, or before the sale of a property.

The IRS requires the net market value and equity of the property purchased must be the same as, or greater than, the property being sold. This includes the price of the replacement property and all costs of its acquisition.

As in the stock example, investment properties are also considered a capital asset. Therefore, capital gains taxes are in play when a house is sold for more than it was bought.

Summary

The 1031 exchange simply lets you continue the investment without recognizing that capital gains tax, thereby allowing the vehicle to grow on a tax-deferred basis.

In fact, there is currently no limit on how many times a homeowner can participate in a 1031 exchange.

With a little knowledge and patience, real estate proves time and again what a good investment it can be.

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