Why Now is the Time to Consider a 1031 Tax Deferred Exchange
I have been getting asked a lot about 1031 tax deferred exchanges lately. Investors are wanting to know what exactly it is, and why everyone is talking about it now. When I hear this it suggests it's time for a post on the topic.
What is a 1031 Tax deferred exchange
As many savvy investors will share with you, a 1031 Exchange is a vehicle that allows you to sell an investment and defer the capital gains taxes. Simply stated, it allows you to roll over the capital gains (which you would ordinarily pay taxes on) into the next investment. Needless to say, there are rules and restrictions around how you must do this, but when done correctly allows you to build up a great amount of equity growth and continue to trade up to bigger and better investments. See 1031 rules and guidelines at Internal revenue code section 1031.
Why is everyone talking about it now?
I can appreciate why this questions has risen as you have not heard much about 1031 exchanges in the past few years. As you understand and internalize what a 1031 exchange is used for, the reason for it being quiet lately and now earning more attention will make sense.
Investors tend to sell their investments when they can get top dollar for them and then they like to reposition that asset into the next great deal or the next emerging market. Now there indeed have been many great deals available over the past decade prompting a lot of purchases. The missing piece of the formula however was the ability to sell their current investment for top dollar.
Now that prices have been rising and they are able to sell their earlier purchased properties for a nice gain, the need to defer the taxes on that gain has surfaced.
What seasoned investors are trading for
Emerging markets: as markets climb in one part of the country there are other parts of the country that are just beginning their growth. It makes great sense to sell their higher priced properties that they have already realized a gain for and reposition into the next growth market.
Trading into different investment classes: Some people who currently own single family homes are trading into larger multi-family homes and vice versa. As the number one choice by tenants lately have been single family homes, we also see people selling their duplexes, triplexes and four plexes and investing in these highly sought after single family houses. The nice thing about 1031 exchanges is there is not really restrictions on how much the investment cost as long as you spend equal to or better than the amount of the exchange. For example if you sell a 200,000 duplex and buy 2 $100,000 single family houses you are good, you just want to be sure you spend all $200,000 to realize the deferment.
Variety of investments: Of course these 1031 exchanges are not limited to just real estate. I have heard of race horses that are being exchanged. The trade must be considered a LIKE KIND exchange but is not limited to real estate. As long as they are investments that get exchanged into a similar like kind of investment and the proper rules are followed you can exchange.
Trade up and escalate your investment portfolio
If you have owned an investment for a period of time and have a hunch that there may be better investments available for you investment dollar, I strongly encourage you to look into the viability of doing an exchange and accelerate your investments forward. We are happy to discuss this with you. If you would like to contact us we can strategize what may work best for you.