.jpg?width=750&height=392&name=exchange-881542122%20(2).jpg)
Investing in real estate can be a boon to your investment portfolio, but we believe one should perform extensive analysis on any potential investments. If you're looking to purchase an investment property, there are many strategies you can use to complete this purchase, one of which is a 1031 Exchange. Here is some information on 1031 Exchange buyers and how to become one.
What Is a 1031 Exchange?
If you decide to engage in a 1031 Exchange, this type of investment strategy gives you the opportunity to sell one of your investment properties and roll your proceeds into a replacement asset. The replacement asset must be "like-kind," which means that the asset you purchase with the proceeds needs to be another real estate asset that has a similar nature or character to the first one. However, the replacement asset can still be of a different quality or grade.
The benefit of engaging in a 1031 Exchange with one of your existing real estate investments is that you may be able to do so without incurring capital gains taxes. Capital gains are accrued when you sell an investment property that has increased in value since you first purchased it. If you initially purchased the property for $200,000 and are now selling it for $300,000, the additional $100,000 would be capital gains. In many cases, the IRS will tax these gains at a rate as high as 20%. If you decide to put these gains into another property, you may be able to avoid paying taxes on them.
How Do 1031 Exchanges Work?
You can perform a 1031 Exchange if you sell a property and purchase another of the same nature. If your existing property is an investment property, the replacement asset must also be an investment property. However, it doesn't matter how you use the property. If your current investment property is meant to be a flipped property that you renovate before selling, you can choose to replace it with a buy-and-hold investment or a rental property investment.
Keep in mind that the property doesn't need to be the same. Let's say you initially invested in a single-family rental home but are now looking to buy an apartment building. Even though these are two entirely different properties, they can still qualify for a 1031 Exchange.
How Can I Become a 1031 Exchange Buyer?
If you have an expansive real estate investment portfolio, engaging in a 1031 Exchange may provide a way to move from one investment property to another without taking on any capital gains taxes. The many reasons to consider engaging in a 1031 Exchange include:
- You want to purchase a property with a higher return potential
- You want to diversify your assets
- You want to effectively reset depreciation
- You want to consolidate numerous properties into one
Before you become a 1031 Exchange buyer, keep in mind that these investments come with relatively high holding times and minimum investments, which you'll want to be prepared for before adding this to your portfolio.
A 1031 Exchange may be an option if you want to purchase another piece of real estate but don't want to pay the capital gains taxes that tend to occur after selling an asset. These exchanges are complex transactions, which is why a thorough understanding of this process is essential.
