The Power of a 1031 Exhange

A 1031 exchange is a powerful tax strategy many real estate investors use that allows you to pay less on taxes by deferring your capital gains on a rental investment property. In order to qualify for 1031, you must use a qualified 1031 exchange company and place the proceeds of the sale of your original property into a custodial account. You can then take your sales profits and move in from a low yield (low cash flow) into stronger performing cash flow property or properties (this is very common for investors moving profits from California, Washington, NY and Florida into midwest or southeast states)

 

Once again, the profits you make are only deferred and they must be used to purchase a more expensive "like kind "property. The rules say that you have 45 days to identify a replacement property to buy and then 180 days to close on that investment property. The power of this strategy is that you are able to avoid paying capital gains taxes and then acquire a larger investment with higher potential cash flow. In essence, the capital gains taxes that you were going to pay is now transferred as a down payment towards that larger property. One last huge benefit is if you hold the property until you die, your children will not have to pay any of those capital gains because the basis (the amount your home (or other property) is worth for tax purposes) will be reset.