If you've been considering making some changes to your rental property investments, one of the things you should understand in advance is the benefit of using a 1031 tax exchange in the process. For those rental and investment property owners who have never sold one of those properties before, the process may be foreign or even completely unheard of. Before you make any changes to your portfolio, here's a look at some of the things that you need to understand.
A 1031 Tax Exchange Can Save You Substantially
The single biggest benefit of a 1031 tax exchange is the savings that it affords you when you're selling a rental property. By opting for a 1031 tax exchange, you can turn that sale directly over into the purchase of another property within the pre-determined timeframe and avoid the capital gains tax that you'd otherwise be responsible for paying. This can save you substantially, especially if you have a lot of equity in the property that you're selling.
A 1031 Tax Exchange Increases Your Buying Power
One thing that many potential property investors don't think about is the fact that a 1031 tax exchange can actually increase your buying power. If you sell the property and skip the tax exchange, then you'll pay the capital gains taxes on that money. Those taxes reduce how much money you have available later to put into another property if you so choose.
However, if you opt for a 1031 tax exchange instead, you'll increase your buying power by eliminating the tax expense. That money can then be used as part of the down payment or total purchase of another property, which may allow you to buy a more expensive property than you otherwise could.
A 1031 Tax Exchange Allows You To Be Hands-Off
When you choose a 1031 tax exchange, you can stay completely hands-off in terms of the money. In fact, you'll appoint an intermediary who will hold the funds for you and then release them directly to the seller of the next property that you purchase. This ensures that you don't have to worry about accounting for or protecting that money while you're looking for another property to invest in. You can stay hands-off and stress-free about the actual cash that's involved.
Talk with a local real estate agent today to learn more about rental property 1031 tax exchanges in your situation. See if this might be the right path for you as you consider modifying your property investment portfolio.