What is the real point of doing a 1031 exchange anyway? - Simplest explanation

Question

What is the point of doing a 1031 exchange? Here is the how I would explain it to a kindergartner:

The true power of a 1031 exchange is the ability for an investor to meet their investment objectives without losing equity to taxation.

With more money they can buy larger, multiple, or more productive properties.

What is the alternative? Paying 30-40% in taxes when they sell

#1031exchange #equity #capitalgains #taxes #deals #like-kindexchange

Michael Doherty · Answer

I've done a few 1031 exchanges, they are a valuable tool! Ensure you work with a team that is familiar with them (accountants / lawyers).

A 1031 exchange is a way for real estate investors to defer paying taxes on the sale of investment property. Essentially, instead of selling a property and paying taxes on the capital gains, you can reinvest the proceeds into a similar property and defer the taxes. This allows you to keep more money working for you in the real estate market, potentially helping you grow your investment portfolio faster.

Mike Auerbach · Answer

And THE most important thing is that you have to work with a Qualified Intermediary BEFORE you close on the property that you are selling.

Bill B. · Answer

Moving out of a state with income tax to a state without before selling, saving 10% or more in taxes.

Exchanging out of a property you’ve fully depreciated.

When you have 10 “little” properties with loans (Say $150-$200k each) and exchanging to either 1 big $2M property or 5 $400k properties to free up more “golden ticket” loans.

If you’re self managing and personally moving and wish to keep self managing in your new location.

When the local/state government turns on you and you need to bail on your market.

When you want to exchange in to a property that might make the perfect retirement home in the future.

When you want to exchange to a more passive NNN property.

When a market turns for the worse and you want to bail, or turns for the better and you want to cash out.

I did one last year to swap from an “older property” built in the late 1990’s to a new build

I didn’t run out of reasons, but you get the point. And I don’t want to write a book about it.

Sean Graham · Answer

I like this explanation!

Bonnie Griffin Kaake · Answer

@Michael Doherty and @Mike Auerbach and @Ellen Steele Don't forget the additional tax benefits available with cost segregation on the new basis as well as 179D. The 179D benefits can be available if this is a commercial building you are exchanging into.

Ellen Steele · Answer

I had a 1031 client who sold an apartment complex in Iowa and purchased five houses with me in Austin to use as short term and long term rentals. They love having the short-term rental properties since that gives them a spot to stay while they're in town!

What is the real point of doing a 1031 exchange anyway? - Simplest explanation

What is the real point of doing a 1031 exchange anyway? - Simplest explanation

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