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Section 1031: How Exchanges May Help Your Real Estate Investments Grow

example, sale and exchange table

Your taxes may have been filed, but here's an opportunity for Real Estate Investors, to grow their proceeds through the Section 1031 exchange. Section 1031 exchange for rental and investment real estate, is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.

In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging. A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies. The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedents death and possibly avoiding taxes altogether. There are specific requirements to be met in order for the exchange to qualify.

For more information on exchanges, see IRS publication 544; the Sales and Exchanges explanations begin at the end of page 2. In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of a Qualified Intermediary to facilitate the intricacies of the exchange.

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