No one wants to pay taxes, especially if there’s a smart financial solution that can save you money. A 1031 Tax Deferred Exchange is a well-established strategy used to defer taxes on the sale of a home or business by purchasing another property. It has become increasingly popular with real estate investors.
1031 exchanges are pretty common in Mammoth Lakes as often people are selling properties in other locations and purchasing here. Or, as is the case of a current client, he’s selling his one-bedroom Mammoth condo and upgrading to a two-bedroom condo.
If you’re buying a property that specifies it has a 1031 exchange condition, it won’t affect you. Only sellers need to think about 1031 exchanges.
Here are the top four things you need to know about 1031 exchanges:
1. They can give you a 100% deferral of federal and state capital gain taxes.
If you buy a property that’s greater or equal value to the property you’re selling, a 1031 deferred tax exchange can defer capital gains taxes on the sale property. A properly structured exchange will be interest-free.
2. They can give you leverage to increase the value of your property portfolio.
Selling a property with equity for a more leveraged, more valuable one that produces more cash flow and greater depreciation benefits will increase your overall return on investment. In other words, you come out ahead. The client I mentioned above is selling a property with quite a bit of equity for another more expensive one, and the new one will generate more rental revenue and bigger depreciation for him, thus giving him a higher ROI.
3. They facilitate diversification.
Using a 1031 exchange allows you to diversify into new geographic markets or switch from a commercial property investment to a recreational property investment. For example, sell your beach house or big city apartment building and buy a Mammoth condo.
4. They can help with estate planning.
Selling a large property to buy several small properties can make distributing your real estate assets to family members easier.
A 1031 exchange may or may not be the right move for you — check with your CPA for specific details on your situation. A neutral 1031 exchange agent is necessary to facilitate the transaction. Ask me if you’d like a referral for someone I’ve worked successfully with.