Section 1031 of the Internal Revenue Code is one greatest wealth building tools available to investors. Obviously investors are using the tax code to defer capital gains taxes, but tax deferral isn’t always the only motivating factor behind a 1031 Exchange. There are a variety of different goals, such as:
Shelter Cash Flow
One of the significant tax advantages to owning real estate is depreciation. However, if you’ve owned property for a long time, you may no longer be benefiting from depreciation. In fact, it may be advantageous to sell a fully depreciated property and acquire a new (larger) property to obtain a new depreciation schedule hence sheltering more (or all) of your rental income from taxes.
Harvest Dormant EquityMany investors have considerable equity built up in their properties. Often, this equity, if leveraged more efficiently can produce greater returns. For example, a rental home worth $1MM, owned free and clear, may rent for $3,000 per month, yielding a return of 3.6%. Exchanging out of the property and acquiring a different type of asset, may yield between 6-8% on the same amount of equity, effectively doubling the return.
Asset Class and Geographic DiversificationWall Street has been advocating the benefits of diversification for many years. A diversified portfolio allows an investor to reduce the volatility of their portfolio and either increase return for a given risk or decrease risk for a given return. It may be prudent for you to consider a diversified portfolio strategy for your real estate investments. Real estate investors generally achieve a diversified portfolio by acquiring real estate in different geographic areas, by acquiring different types of real estate, or both. If you own all of your investment real estate in a flood plain, it may be time to diversify.
Relief of Management BurdensTired of dealing with toilets, tenants and trash? It may be time to exchange into an easier to manage property. Triple Net Leased investments and Tenant in Common investments allow you to own institutional grade property that is professionally managed, providing the same benefits you currently receive without the management hassles. Commercial properties may also be much easier to manage than Section 8 apartment buildings. If you are looking to reduce your management burden, it may be time to consider a 1031 Exchange.
*Article Courtesy of Asset Exchange Company