It would be unwise to ignore the benefits that come with taking part in a Section 1031 property exchange. You would be leaving money on the table when selling and buying a commercial property. Working with a 1031 exchange qualified intermediary, you can legally stiff the Internal Revenue Service (IRS) and laugh all the way to the bank. Surprising as that might sound, the federal government offers investors in the capital intensive commercial real estate great incentives.
Taking advantage of Section 1031 of the tax code can help you build an incredible real estate portfolio. As many investors realize the value of swapping properties, they are moving in to harness these benefits. You, too, can join the rank of savvy investors and grow your wealth.
Just what does a property swap entail?
Just as the name suggests, the process is a modern-day barter, only with a bit more juice and class. Needless to say, you will follow some tight guidelines from IRS when swapping properties. The process is referred to as an exchange as you don’t get to pocket any of the sales proceeds. Well, that is if you wish to enjoy the full tax breaks that come with it.
The fancy part of this exchange is that you don’t exactly swap one property with another one. Instead, you get to sell your current commercial building and use every last of the sales proceeds to buy another property of equal or higher value. Not pocketing any of the money might seem like a bummer but it isn’t, not when you consider the other benefits.
Improving financial position
An ordinary sales process entail selling a property, paying capital gains tax on it, and buying a new property. That means that you end up with a relatively smaller purse when the dust settles. With a 1031 exchange, you get to deferred 100 percent of the capital gains tax. That means that if you generated $10 million from the sales, you get to use the whole sum as your war chest when making an acquisition.
The exchange allows you to buy replacement properties worth up to twice as much as your original property. The fact that you don’t pay tax leaves you in a stronger financial position, especially when looking to finance the buy. You will be starting with almost 50 percent equity in your new property, marking you as a low-risk borrower. Lenders are more than happy to indulge such customers and can reward you with interest rates that are below market rates.
Naturally, a high-value property comes with rental prices. One of the hidden benefits of a property exchange is that you get to increase your rental income as soon as the process is complete. The additional revenue should be enough to service the mortgage and leave you with a sizeable profit. The extra income is enough to make up for not getting any of the sales proceeds. If you never sell the property, you can ride these benefits for life. In fact, there’s no limit to the number of swaps you can carry out.
If the idea of getting your money to work for you instead of passing it to the government, then you should look into a 1031 property exchange. That way you can defer paying capital gains tax when you dispose of a commercial property and use the money to buy a bigger one. Best of all, you have the full support of the government when doing so.