Real Estate and 1031 Exchanges
Andrew Carnegie once said, “ninety percent of all millionaires became so through real estate.” To this day, Mr. Carnegie’s words ring true, with real estate investing contributing to the financial success of many people around the world. It’s no wonder that one would want to know a way to get onboard the investing train toward accumulated wealth. While there are many methods of real estate investing that can be explored, a surefire way is the use of 1031 exchanges throughout your real estate investment journey.
What is a 1031 Exchange?
A 1031 Exchange refers to Section 1031 of the Internal Revenue Code that provides an effective strategy for deferring capital gains taxes from an investment property sale. By exchanging the property for like-kind real estate, property owners may defer their taxes and use the proceeds to purchase a replacement property. Like-kind real estate includes business/investment property but not the owner’s primary residence.
Why a 1031 Exchange?
Any property owner or investor who expects to acquire a replacement property after selling their existing property should consider a 1031 exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts that can approach 30%. We aim to help investors keep more of their hard-earned money working for them.
Use this Strategy to Incur Wealth
The strategy of incurring wealth through a 1031 exchange is one that takes time. Here is a breakdown of how it works.
You start with an initial investment, let’s give a simple example of $10,000.
The first step would be to put the $10,000 into an investment property. As time passes, investment property A would appreciate. When the time comes, you can choose to sell investment property A. Before you put it up for sale, you formally identify another property that you plan to purchase, investment property B.
You sell property A and make a nice profit. The profit from that sale plus your original $10k can be used for a down payment on a bigger and better property. You don’t pay capital gains tax because you’ve complied with the rule of Section 1031.
After some time, investment property B has also appreciated, and is worth substantially more, so once again, to comply with 1031 code, you IDENTIFY a new property, SELL investment property B, and then use the profit from your sale (plus your initial $10k) to PURCHASE another bigger and better property (investment property C).
This cycle can repeat and repeat itself, all the while enabling your initial investment amount to grow. During the time of growth, you will also likely be benefitting from passive income from rent payments. Additionally, your portfolio will increase in value as you continue to add assets to it. Because of section 1031, you will have been able to exponentially increase your funds without paying capital gains.
Once you are satisfied with the growth of your portfolio, you can choose to sell your assets, pay capital gain taxes, and benefit from your accumulated wealth.
As you begin your ascent toward accumulating wealth through 1031 exchanges, Millcreek Commercial wants to be there for you along the way. Whether it be helping you become a co-owner of your first investment property, or being the avenue in which you identify a future commercial property to exchange–Millcreek Commercial is here to help.
Additionally, you can watch this past webinar where we cover the basics of 1031 exchanges: Webinar | The Benefits and Pitfalls of a 1031 Exchange