The 1031 Exchange: the most powerful tax strategy in the world, and Millcreek Commercial has properties ready for your identification!
What Is a 1031 Exchange?
Real estate offers middle class investors the same opportunities to acquire, grow and transfer wealth as the financial elite through several tools. The most powerful of these tools is the tax deferred 1031 exchange. A 1031 exchange is a tax-deferred transaction that allows real estate investors to swap one investment property for another, while deferring taxes. Millcreek Commercial helped our clients defer an estimated $13,875,250 in state and federal taxes in 2022 ALONE! The power of the 1031 exchange is significant—let us help you save millions!
This article explores the benefits of 1031 exchanges and highlights how they can contribute to wealth accumulation, financial success and even generational transfer of accumulated wealth. Paired with a Millcreek Commercial Property, your next real estate investment will prove to be your smartest investment yet!
Real estate investments are given favorable consideration by the IRS. An investor in real estate gets to deduct all typical business expenses plus the interest paid on the loan they use to leverage into their investment. Additionally, investors are allowed to depreciate the investment, shielding much of their net income from taxes. Real estate consistently appreciates over time creating significant wealth accumulation. For many investors, this can create problems as they approach retirement.
A Real-World Example
For example, imagine a hypothetical 70-year-old couple (let’s call them Dave and Dixie). When they were 30 something, they purchased a rental property in the community where they lived. Back in the day, they put down their $20,000 life savings to purchase a $100,000 fourplex. Over the ensuing 35 years, they paid off the mortgage and fully depreciated the investment. Dave grew up on a farm and was handy around the house. He enjoyed the upkeep. Dixie liked keeping the books and dealing with the renters (most of them anyway).
Today, after expenses, Dave and Dixie clear $3,500 per month in rental income. Dixie wants to retire. I mean really retire: move to Florida, drink margaritas on the beach, and take the grandkids to Disney World. Dave likes to golf. It did not take a lot of arm twisting to get him to catch the vision. Dave learns that he can expect to net $1,000,000 from the sale of their fourplex. Dixie consults with a financial advisor who suggests that they invest the proceeds into stocks and bonds and withdraw 4% of the original value every year. That is barely less than what they make from the rental income. This conservative approach would insure that they would not outlive their wealth. “Florida, here we come!”
Their rental property gets under contract almost immediately. Dixie contacts their tax advisor to tell them they are selling the rental property and moving to Florida. During this discussion she is horrified to learn that the sale will create a taxable event and that she and Dave will face in excess of $300,000 in state and federal taxes upon the sale. Dixie has always been good with head math. She quickly calculates that their retirement income will be reduced by $12,000 per year. That is a lot of Disney passes and even more margaritas.
What Dave and Dixie learned next will shock you: a little internet research turned up that the IRS provides a perfectly legal way to avoid the $300,000 tax burden. They just have to follow a few simple rules to keep the entire $1 million. The wealthy have been benefiting from the most powerful real estate tax strategy known to man since 1923. This $300,000 gift is enabled by Section 1031 of the US Internal Revenue Code. Referred to as a 1031 exchange, this tax strategy enables Dave and Dixie to legally shield all of their gain from the government. By shielding their gain and deferring taxes, Dave and Dixie can leverage all of their 35 years of profit (rather than pay $300,000 in taxes) and reinvest the full proceeds from the sale of their investment property so long as they invest into a like-kind property. This tax deferral mechanism frees up more capital to invest in higher-value properties, resulting in increased potential for long-term wealth accumulation.
But wait! Weren’t they selling their rental units to escape the landlord lifestyle and live a headache free retirement? This is when they discovered Millcreek Commercial and proportional commercial real estate investments. Dave and Dixie sat down with a Millcreek real estate investment advisor and selected a safe, secure and stable commercial property. They decided to use their $1 million to 1031 exchange into a fractional Tenant-In-Common interest of a medical office building paying a 6% passive return. Dixie and her head math immediately went back to work. A $60,000 a year realized return? Even Dave could immediately grasp how many rounds of golf a 50% increase in their retirement income would fund.
At closing he told the escrow officer, “The best part of this deal; I’ll never have to mow that yard again. Instead I will be watching the groundskeepers mowing the fairways. ”
If you are currently trapped in a residential real estate investment, take advantage of the many benefits of 1031 exchanges and get into commercial real estate. There is no better way to passively store wealth than through a Millcreek Commercial property. With a Millcreek NNN lease, the tenants pay all the expenses, and a lease administrator handles the daily details. This means you can finally start doing more of what you love, rather than dealing with the headaches associated with residential landlording.
Increased Cash Flow and Diversification
Another benefit of 1031 exchanges is the opportunity to optimize cash flow. By exchanging properties, investors can acquire income-producing commercial assets in quality markets, enhancing their cash flow potential.
By coupling a 1031 exchange with Millcreek Commercial’s investment portfolio, investors can diversify their real estate portfolio across different property types, locations, or asset classes, reducing risk and enhancing the resilience of their investment holdings. For example, an investor can diversify with a childcare center in West Chicago, an ambulatory surgical center in Crockett, and a QSR in Herriman.
Portfolio Expansion and Upgrading
1031 exchanges can facilitate portfolio expansion by enabling investors to acquire properties of greater value and potential. Through the exchange process, investors can consolidate multiple properties into a single, higher-value property, thereby streamlining their management efforts while simultaneously increasing their investment’s appreciation potential. This scalability can significantly contribute to long-term wealth creation.
A Real-World Example
By way of example, let’s take a look at Dave’s brother, Doug. He owns five residential properties. He is tired of the headache, constant maintenance work, and late-night phone calls from his tenants. Maybe he is just a little jealous of Dave’s golf game, too. He decides to engage Millcreek Commercial and put the power of a 1031 exchange to work for him. Upon the sale of his five properties, he was able to take the full proceeds and invest them into a single Millcreek property (or several to diversify), allowing him to join Dave on the golf course. Ready to upgrade your retirement? Schedule a call with our team here.
Wealth Preservation and Estate Planning
Another important benefit of 1031 exchanges is the preservation of wealth and the facilitation of effective estate planning. By continuously exchanging properties, investors can defer taxes throughout the life of their investments, ultimately leading to a larger estate. Additionally, when investors pass away, the tax basis of the properties in their estate is adjusted to current market value, eliminating a lifetime of deferred taxes for their heirs. This aspect of 1031 exchanges can significantly contribute to generational wealth transfer.
Now, let’s go back to Dave and Dixie. Remember that $300,000 that they deferred? After they pass away, under current estate law, the taxes are fully eliminated. Their kids don’t have to pay it, which means your wealth can grow exponentially throughout your life, and you can defer your taxes for the rest of your lifetime.
Flexibility and Adaptability
1031 exchanges offer investors a high degree of flexibility and adaptability to suit their changing investment goals and of course, the conditions of the real estate market. Investors can exchange various types of real estate, meaning that an individual exclusively owning residential can switch to commercial. This flexibility allows investors to capitalize on emerging opportunities and adjust their investment portfolio to align with evolving market dynamics.
The benefits of 1031 exchanges are truly undeniable for real estate investors seeking to maximize their wealth-building potential! The tax-deferred growth, increased cash flow, portfolio expansion, wealth preservation, and flexibility offered by 1031 exchanges make them a powerful tool for investors to build long-term wealth and achieve financial success. By harnessing the power of 1031 exchanges, investors are able to defer potentially millions of dollars in taxes, and rather use that value to build their wealth throughout their lifetime. Not only do 1031 exchanges help investors build wealth, but they also provide investors with a competitive edge in achieving their financial goals. Our aim at Millcreek Commercial is to help you get there. We always have properties available for your 1031 exchange.
Looking for a replacement property? Interested in a passive, hands-off commercial real estate investment? Browse our available properties here.