The 1031 - Investor's Edge
A 1031 Tax Deferred Exchange is one of the most uniquely profitable investment tools an investor can use to increase wealth. Yet exchanges remain widely misused . . . or not used at all. Too many investors fail to appreciate the advantages of tax deferred exchanges; they do not recognize how exchanges can and will benefit all future transactions. So as an investor, if you like the idea of freely increasing your capital with every deal, then 1031 exchanges should be part of your strategic planning.
If the Government Gave Real Estate Investors
Free Money . . .
Suppose there is a governmental program that will give real estate investors free capital for greater investment. Allowing them to buy more property and better leverage their portfolio. Now imagine that the terms to the free capital are as follows:
- The investor does not have to pay any interest on the money the government gives them.
- The government's capital can be leveraged to the investors highest capable financing ability.
- There is no repayment due date . . . the investor can perpetually keep the money as long as have it invested real estate.
- The investor keeps 85% of all net profits the government's (leveraged) money makes them—only owing the government their 15% when the investor is done using it.
- With proper long-term investment practices, the investor may be able to avoid fully paying back the government’s donated money, and/or the profits derived therefrom.
Sound good? It is already available. it is a 1031 Tax deferred exchange. But to properly use exchanges correctly, investors need to work them forward, into their future transactions. Because the more forward you look, the more money you make . . . and that is the point to investing in the first place.
What is a 1031 Tax Deferred Exchange:
The term 1031 exchanges refers to the IRS code, IRC§1031, which allows investors the opportunity to defer their payment of capital gains tax, and depreciation recapture tax upon the disposition of their investment property. Although this may sound confusing – and IRS regulations on 1031 exchanges are complex—the general concept behind tax deferred exchanges is relatively simple.
If you make money on real estate . . . you owe some of that money to the government in tax. (The two main taxes are capital gains--15%, and depreciation recapture--25%.) An exchange, provides the investor with the opportunity to defer payment of those taxes when properly reinvesting their proceeds back into more investment real estate.
The confusion with exchanges is that "deferment of payment" is not the same as "cancellation of debt." Exchanges do not extinguish the obligation to pay, they just delay the due date on which the debt is owed. For this reason, many investors fail to see how 1031 exchanges provide a benefit at all; they don't see how carrying forward a debt can be a financially powerful thing to do. It all depends on what the investor does with the extra money . . . and the results can be amazing!
Look Forwards for Profits –
Not Backwards for Savings:
The phrase "1031's save you money on taxes" is the most common statement about exchanges, it is also the most inaccurate. 1031 exchanges do not "save" you money . . . they "make" you money (that has always been the intent). Because the tax obligation is triggered from the property being sold, most people naturally think that 1031s relate to the "sold" property. From this, they assume that the benefit of the 1031 is simply saving money by circumventing a debt payment. 1031's however, have no benefit relative to the "sold" property. Instead, 1031s relate to the financing of future property. (Remember IRC §1031 is a tax code; it doesn't regulate real estate -- it regulates your money.) So to understand how to get the most benefits from 1031s, investors need to understand how exchanges relate to the future use of their money; how it extends the leveraging and compounding of future properties.
Keep reading for more information on how you can apply this powerful advantage to your investing business.
Learn More About The Power of 1031 Exchanges...