Benefits Of The 1031 Exchange
Income Tax Rates Still High; Significantly Reduces Available Cash Position
Combined Federal and state depreciation recapture and/or capital gain income tax liabilities on the sale of real estate may be as high as 35%, and even more in certain situations. The payment of income tax liabilites from the sale of real property can dramatically reduce the real estate investor’s equity and cash position, which in turn impacts the real estate investor’s ability to build his or her net worth by purchasing larger, more profitable investment properties.
Defer Payment of Income Taxes By Reinvesting
The 1031 exchange allows the real estate investor to sell one or more relinquished investment properties and defer the payment of his or her ordinary income, depreciation recapture and/or capital gain taxes by reinvesting in one or more replacement rental or investment properties.
Tax Deferred; Not Tax Free
It is important to note that 1031 exchange transactions are tax deferred and not tax free. The payment of the real estate investors income tax liabilities is merely deferred into the future and would be fully recognized should the real estate investor decide to sell his or her investment properties and pay the taxes by cashing out.
Swap Until You Drop
1031 exchanges are certainly great transaction tools, but it is an even better wealth building tool. Real estate investors that continually 1031 exchange throughout their lifetime will build their cash flow and networth significantly more than an investor who chooses to pay his or her income taxes as they go. It's what we call 'Swap Until You Drop.'
1031 Exchange Keeps All Equity Invested
The ability to defer the payment of income taxes allows the real estate investor to reinvest 100% of his or her equity (cash position) in replacement investment property and consequently improve his or her cash flows and net worth.
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