A 1031 exchange refers to Section 1031 of the US tax code, which allows investors to defer capital gains taxes from the sale of investment property, provided that funds are “exchanged” or reinvested in like-kind property, which is broadly defined as property held for investment or business purposes.
Similar to a 401k, a 1031 exchange may efficiently build wealth by keeping more dollars at work. The IRS allows subsequent exchanges each time a property is sold, allowing equity to grow tax-deferred over an extended period of time.
Like many tax provisions, 1031 exchanges are subject to several rules, which if violated, may jeopardize tax deferment treatment. However, with proper planning a 1031 exchange can be a powerful wealth-building tool. Less tax implications may result in higher-value investments, both in equity and cash flow.
1031 exchanges can also be an important component of estate planning. With proper planning, at the time of the investor’s death, properties may be passed down to their heirs on a stepped-up tax basis, potentially allowing for tax-free inheritance.
1031 exchanges have allowed many real estate investors to grow equity over the long term and provide tax efficient generational wealth transfer. When properly executed, they are the foundational step in creating an Investment Property Wealth Management™ strategy.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
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