A 1031 tax exchange can help build your net worth. Under Section 1031 of the U.S. Internal Revenue Code, the capital gains tax can be deferred when you sell an investment property in exchange for a similar property, also known as like-kind properties. As long as there is a like-kind purchase, the capital gains tax that would typically have to be paid upon the sale can be deferred.
A 1031 tax exchange can help build wealth for investors in several ways.
Defer Capital Gains Tax to Maximize Equity
When you sell an investment property, the capital gains tax required to be paid will significantly reduce the amount of money put in your pocket from the sale. The capital gains tax could be anywhere from 15 percent of the sale proceeds up to 20 percent to the IRS, not to mention state taxes and other taxes.
In a 1031 exchange, you can defer the payment of the capital gains tax and use that money to increase your buying power into a new investment property. You can buy a property with higher value by using the money you saved from having to pay the tax; this builds wealth.
A 1031 exchange does not require you to purchase a similar type of property that you just sold. It can be just about anything as long as it is an investment property. For example, you could sell a condo in Miami and exchange it to purchase an apartment building in New Jersey. This diversifies your portfolio and decreases risks.
Take Advantage of New Investments
After the sale, the increased money in your pocket increases your leverage when buying new like-kind properties. Because of this, you can also consider different types of investments.
Increases Generational Wealth for Beneficiaries
Another benefit of a 1031 tax exchange is that it could increase generational wealth because it allows for a “step-up in basis” when the owner of a property passes away. The cost basis is “stepped up” to its fair market value, eliminating the capital gain.
Upon the owner’s passing, the capital gains tax will be deferred. In community property states, a spouse and other beneficiaries, such as children, can receive a full step-up in basis when they inherit the property.
Our Skilled Facilitators Can Help With 1031-Related Wealth Building
If you need help with a 1031 tax exchange, speak with one of our skilled facilitators at 1031 Federal Exchange. For a free consultation, call us at 513-450-3039 or contact us online today. We are located in Loveland, Ohio, and we serve clients nationwide.