Why do a 1031 Exchange?

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1031 is a section of the tax code that allows you to sell your investment property (almost any property other than your personal residence), buy a new investment property and defer all of the capital gains taxes from the old property to the new one.

This does three things for you:

  1. you don't have to turn over to the government upwards of a third of everything you made on the property

  2. you now have all that extra money to spend on the new (replacement) property

  3. it may help you avoid the dreaded Alternative Minimum Tax (AMT). In short, its way of preserving your working capital as you build your real estate empire.

all the money you would have paid to the government is now available to buy a better condo...

Here's an example: Let's say you have a rental house you have owned for several years. It's gone nicely up in value and the depreciation write-off has given you good cash flow. It's been a good investment, but what you'd really like is a condo at a ski resort. If you just sold the rental house to buy the condo without doing a 1031 exchange, your tax bite could be huge (25% for depreciation, 15% for federal capital gains, 0-11% for state capital gains, and then there's that dreaded AMT).

If, you did a 1031 exchange instead of just selling the rental house outright, all of those taxes you would have owed would be transferred (deferred) over to the condo. And all of the money you would have paid to the government is now available to buy a better condo.

Of course, there are rules involved. For a quick review of them, see the Six Things You Need to Know about §1031. If you're seriously contemplating doing an exchange and want to talk with an expert about your particular situation, give The Experts a call, nationwide toll-free, at 866-694-0204. We're available around the clock, 24/7.

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