Exchange your investment properties to receive several benefits.
If you invest in real estate, you are probably always on the lookout for new investment opportunities. While there is always more real estate that can be bought, sometimes it may be beneficial to do a property exchange. A 1031 exchange is an exchange of two properties between people that has several benefits over buying and selling.
Tax deferral
Section 1031 is the part of the IRS code that deals with property exchanges. The reason this type of exchange is in the tax code is since there is no cash involved with the transfer (the properties simply have a change of owner), there are no taxes paid. This means that an investor can get into a new property without having to worry about capital gains taxes. You are basically getting an interest-free loan that has no limits on it. Also, if you continue to move your properties through 1031 exchanges, you can defer your taxes indefinitely. This can be a huge advantage, especially if you are heavily invested in real estate.
Diversification
You can greatly diversify your holdings to include several types of buildings in several different geographic areas. For example, you can take an office complex you own and trade that for several apartment buildings located in different states. This will allow you to take advantage of areas that are experiencing a large increase in the value of their real estate. Since you can transfer your properties as many times as you like, you can quickly and easily move through the country to maximize your income stream. Finally, getting into different types of buildings will allow you to gain experience in the various kinds of real estate on the market. This will allow you to expand your portfolio because you will be familiar with the ins and outs of residential and commercial real estate.
Relief from costs
Many investors have one or two multi-unit apartment buildings or houses in their real estate portfolio. Owning property, especially ones that you rent to tenants, comes with a huge costs. If you manage the buildings yourself, there is a huge time and materials cost (for maintaince and upgrades) which you have to bear. Even if you have a property management company maintaining the property for you, you have the burden of being the sole owner of the property. By placing those homes or apartment buildings into a 1031 exchange, you can get away from those apartment buildings and turn your investment to ownership in an office building. These type of 1031 exchanges usually have multiple owners and act more as an investment into a security as you are futher removed and the burden of ownership is spread out. This type of ownership is worth it when compared to the time and cost of maintaining properties yourself.
