Your investment goals are never set in stone. New developments, life milestones, and career progress can alter what you want in your portfolio. Thankfully, there are many tools and strategies you can use to consolidate your assets and make them efficient to serve your needs. One promising option is a 1031 exchange.
More than helping with capital gains tax deferral, 1031 exchanges have features that allow you to consolidate your assets, streamline operations, and even reduce overhead. Below, Realized 1031 has shared an article explaining how. Keep reading to learn more.
In the world of investment and finance, portfolio consolidation is an advanced strategy where you merge your smaller assets into fewer, larger ones. This practice serves as a strategic move for many reasons. For example, an investor who cannot handle the burden of managing several properties might consolidate them into one or two bigger rental properties to make operations manageable. Other investors consolidate to improve cash flow as bigger assets are usually more cost-efficient.
Whatever the reason for it, portfolio consolidation is an important tactic that helps you reach your investment goals. The most traditional method is selling your smaller assets and reinvesting all the proceeds into a bigger property. However, there are other approaches you can try to streamline the process and even defer tax liability.
Also called the like-kind swap, 1031 exchanges allow you to sell a property and reinvest all the assets in a like-kind asset. When done according to IRS rules, the transaction will enable you to defer capital gains taxes and preserve more of your equity. This benefit isn’t accessible in a traditional real estate sale. As such, the 1031 exchange becomes a valuable strategy that lets you consolidate your portfolio while also preserving your wealth.
There are also other advantages, such as the following.
1031 exchanges are not the only way to consolidate your portfolio. However, this transaction is more suitable for some types of investors than others.
One example is those nearing retirement. In many cases, the properties these investors are holding are highly appreciated. A traditional sale would result in a huge tax hit that diminishes their cash flow substantially. However, a 1031 exchange delays these tax liabilities and may even result in a step-up in basis upon the investor’s death. As the cost basis of the replacement property resets, all accumulated capital gains are eliminated.
Portfolio consolidation can also benefit investors seeking to reduce costs. Managing fewer properties held reduces overhead and streamlines operations, increasing the chances of higher profits.
When considering strategies for consolidating your portfolio, make sure to include 1031 exchanges in your list of options. Aside from the tax-deferral benefits, the like-kind exchange can help with diversification, potentially increase cash flow, reduce management burden, and more. Consult with a knowledgeable 1031 exchange expert to gain a further understanding of how this transaction could be suitable for your goals.
Sources:
https://taxfoundation.org/taxedu/glossary/step-up-in-basis/
https://www.americanbar.org/groups/real_property_trust_estate/resources/real-estate/1031-exchange/