1031 REPLACEMENT PROPERTY
A 1031 Exchange can help many property owners trapped by management responsibilities to increase their monthly income and reduce their overall investment risk. With good investment planning and the careful selection of the right 1031 replacement property an owner can frequently make both a wise investment choice and improve the quality of his/her life.
This article addresses how investors can reposition their portfolio with 1031 investments.
I Preservation of Equity
Selecting the right 1031 replacement property can provide real estate investors with the opportunity to defer 100% of both Federal and State (if applicable) capital gains taxes on the sale of their existing 1031 investments. In effect the 1031 Exchange is a tax free loan that allows the investor to continue to reposition assets and build wealth with money that would otherwise be lost to taxes as they exchange into progressively more desirable 1031 replacement properties.
II Increase Income and Tax Deductions
Many investors exchange from a property where they have a high equity position or one that is “free and clear” into a more desirable 1031 replacement property where they can both increase their income and reduce the taxes on that income. A larger property can produce greater cash flows, the opportunity to more rapidly build up equity, and increase the tax shelter that greater depreciation can provide.
Frequently real estate investors make their money by concentrating their wealth in a given area; they keep that wealth by diversifying. To protect the wealth they worked so hard to build up the investor should diversify by geography, asset class (retail, multi family, office etc.) and by risk category. Many investors use 1031 TIC investments to maximize their diversification strategy. Click here to find out more about 1031 TIC investments.
IV Management Relief
Often investors have created wealth through management-intensive asset classes such as multi family or single family rentals. While this is an excellent way to create wealth, many investors reach a time in their lives where they have “had enough” and want to enjoy the fruits of their labor. By switching asset classes to net leased properties (where the tenant does all the management and the owner receives a monthly check with little to no involvement in the property) or to a synthetic net lease investment (ie. tenant in common or similar) the owner can enjoy the benefits of real estate ownership while avoiding burdensome management responsibilities.
V Estate Planning
Capital gains taxes are forgiven and a new basis is established when a property is passed from one generation to the next. A diversified portfolio of properties that requires little or no management offers the flexibility to designate specific properties for heirs who might not have the time or the inclination to manage real estate.
As with any investment decision it is important to consult your tax and or legal professional to make sure the investment fits your needs.
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