One of the downsides of buying and selling investment properties is that it can make you vulnerable to capital gains taxes. Fortunately, there’s a smart tax strategy that can help you avoid this (and build up your wealth in the process).
It’s called a 1031 exchange, and it involves selling one asset and putting that money toward another “like-kind” investment within a certain time frame. This delays capital gains taxes and, when done right, allows you to gradually build a moneymaking real estate portfolio.
Here’s what to know if you’re planning to use 1031 exchanges to start building wealth through your real estate assets.
Timing matters. The key with 1031 exchanges is timing your sale and purchase properly. You must identify your new investment within 45 days of selling your first investment, and then fully complete the purchase within 180 days of that sale. That gives you about six months for the entire process.
Make sure the new investment is “like-kind.” IRS code requires your capital gains to go toward a similar asset in order to be eligible, but most real estate-for-real estate exchanges qualify as long as the new property is of equal or greater value. Examples include single-family rentals for apartment buildings, duplexes for office buildings or raw land for a shopping center.
Try a step-up approach. Since you can move between property types during a 1031 exchange, they can be a good way to gradually grow and expand your portfolio into bigger and more lucrative properties. With each exchange, you can take on a property that commands larger rents or offers more commercial possibilities.
Are you ready to sell or invest in a new property for your portfolio? Get in touch today.
