As we approach the end of the year, it’s common for many of us to reflect on our financial goals and start making a list of resolutions for the upcoming year. Some of us may be aiming to diversify our real estate portfolio, boost our revenue streams, enhance our businesses, retire, or simply carve out more time to savor life. All of these objectives are commendable! If you’re an investment property owner, a 1031 exchange could be the ideal strategy to help you achieve those New Year’s resolutions.
A “like-kind exchange” or “1031 exchange” is a tax strategy that facilitates movement in real estate investments that are held for business, trade or long-term purposes. This method involves swapping one category of real property – which can include rental or investment properties, offices, apartments, undeveloped land, and other similar assets – for another that qualifies as “like-kind” under Section 1031 of the Internal Revenue Code. The complete equity, appreciation, and depreciation recapture accrued in the original property is transferred to the new property, deferring the capital gains tax until the investment is sold at a future date. Only the net proceeds are taxed immediately. By using a 1031 exchange, investors can leverage their cash flow to increase their purchasing power and avoid immediate payment of the full tax liability, freeing up funds that can be used for other investments.
Investment.org can help you accomplish your goals by serving as the necessary, impartial Qualified Intermediary, leading you through deadlines and documentation, organizing your exchange, and securely holding your assets, funds, and property. With Investment.org’s assistance, you can turn your resolutions into successful outcomes!
Thus, which objectives can you attain through a 1031 exchange?
Diversify your investment property portfolio
A significant advantage of the 1031 exchange is the opportunity to diversify your investment property portfolio to align with your requirements and establish a well-rounded real estate portfolio. Whether you aim to broaden your property types or expand to different geographic areas, the 1031 exchange can assist you in achieving this objective.
Build wealth, maximize your buying power, and increase cash flow
Are you already considering a purchase? Why not use Section 1031 to trade in your investment properties for a replacement property with a higher ROI? By saving on capital gains through the exchange, you can increase your down payment and stretch your purchase budget further towards a more significant investment. Alternatively, you can use the additional funds to enhance the replacement property, be it a newer, more extensive, or better-located property that generates more income. Trade up and benefit from the additional cash flow.
Expand your business or relocate facilities
Whether your existing premises are too large, too cramped, or located in an unfavorable area, a 1031 exchange can assist you in expanding or relocating to a new, more desirable replacement property. Since the exchange delays the gain and maintains the depreciation recapture of the original property, all of the equity is preserved in the new facility. You can even divide your equity among multiple locations using a 1031 exchange.
Retire or exit your business
Suppose you possess a business and intend to retire, and you own real estate that your business occupies. In that case, you can exchange this real estate for other investment property. This conversion allows you to transform your business property into investment real estate for retirement and create a reliable cash flow to fund your retirement income.
Retire, move, or acquire a vacation home or new personal residence
Properties utilized as personal residences or vacation homes do not meet the requirements for a 1031 exchange since they are not exclusively used for business or investment purposes. Nevertheless, specific conditions may apply. By following safe harbor conventions and exercising patience, you can obtain income properties that you might eventually convert to personal use, such as a retirement or primary residence in a new location, or to acquire a vacation home. If you decide to sell your primary residence, particular scenarios allow you to claim a prorated exclusion of up to $250,000 for a single person or $500,000 for married couples filing jointly. In the meantime, utilize the property for rental income!
Combine financial tools to accomplish other goals
The scope of Section 1031 is restricted to investment or business-use real property for eligible like-kind exchanges. Nevertheless, when combined with other financial instruments, an exchange can optimize your investment potential for other opportunities and objectives.
By utilizing the equity transferred through a 1031 exchange, you can opt to refinance and access cash for various purposes such as paying for college tuition, renovating the new property, or expanding your business staff. Furthermore, for tangible personal property used in your business, you may be qualified for 80% immediate expense on the acquisition of new capital assets. This allows you to replace equipment, fixtures, and furniture to set yourself up for future growth in 2023 and beyond. While Investment.org and all Qualified Intermediaries cannot provide tax or legal advice, it is recommended that you consult with your tax counsel.
Reduce stress, simplify your investments, and gain more time to enjoy life
If you own rental properties, you are well aware of the time and effort required to manage and maintain them. To complement your real estate investments and simplify your financial life, you can consider utilizing 1031 exchanges in conjunction with passive investment products such as Triple Net Lease (NNN) properties or Delaware Statutory Trust (DST) interests. These investments can provide you with more free time to pursue other activities. As with any investment decision, it is important to consult with your tax or legal counsel to evaluate your options.
Summary
A 1031 exchange can offer significant tax benefits to both real estate investors and business owners, making it a valuable financial tool. By swapping your business or investment property for a like-kind property, you can take advantage of the benefits of continuous investment in a property that aligns with your specific needs and goals. At Investment.org, our exchange officers are highly knowledgeable about 1031 exchanges and can provide you with top-quality, attentive services to help you achieve your investment resolutions in 2023.
