Eager to harness the process that comes with it, commercial real estate investors are making 1031 land exchanges part of their investment plans.
Also known as a property swap, a 1031 property exchange lets investor defer their capital gains taxes when selling a property. The process covers every aspect of the commercial real estate sector and is a proven way to help players in this sector grow their wealth and property holding quickly.
Free bags of cash
Ordinarily, the government takes an uncomfortably huge chunk of any gains you make in the real estate sector. You need to pay Federal and state capital gain tax, depreciation recapture, and net investment income tax upon selling a real estate property.
Depending on your tax bracket, these taxes slash your capital gains by up to 40 percent. Now, if you choose to take part in a 1031 property swap, you get to sidestep all these taxes without any legal repercussions whatsoever.
As is the nature of the beast, the government only lets you defer the capital gains taxes indefinitely but doesn’t write them off. But you can make the deferment permanent if you so wish. You only need not sell any properties that were acquired through a property swap through the standard selling method.
That’s not to mean that you can’t sell the property. Instead, you need to keep swapping a property for another if and whenever, you need to sell. As long as you don’t break the chain, you can pass the tax deferment benefits to your heirs.
Isn’t that limiting?
At first glance, a property exchange might seem limiting, but on the grand scale of things, it really isn’t. Instead, it opens a whole new world of possibilities to you. For starters, it opens up the entire country as an investment destination, since you can buy a replacement property anywhere in the 51 states.
Secondly, 1031 property exchange covers all sectors of the commercial real estate scene. You are free to spread your new acquisition in just about any subsectors with the broader commercial real estate scene. That means you can swap a piece of agricultural land for an apartment block, office block, an industrial complex, a mall, anything with a commercial application.
Again, there are no geographical limitations when it comes to this process. You can spread your real estate holding over one or several states. That means you can have your pick from the choice real estate markets in the country.
You can drop any poor performing properties and states from your portfolio and replace them with lucrative ones.
Savvy commercial real estate investors are quick to recognize the value of making property swaps part of their investment strategies. The move lets them increase the size and spread of their real estate holdings across various subsectors and markets in the country.
That helps to grow your bottom line, pursue emerging and lucrative markets and spread your risk exposure. Best of all, the property swap process lets you hang on to your capital gains each and every time you sell a property.