Most real estate investors would agree that a 1031 exchange is a valuable tax deferral strategy that allows them to opportunity to roll all of the equity from the sale of a piece of investment real estate into another investment property that better suits their current needs. What many do not realize is that there are three other key advantages of 1031 exchanges besides tax savings.
1. The opportunity to move markets. Many of Midland 1031’s exchanges are with investors who are looking to sell investment real estate up north and reinvest into property in South West Florida (SWFL) where they ultimately intend to retire. When they do eventually retire, their investment properties will be in the same state, and easier to manage.
2. The ability to convert the investment property to a personal residence. Taking our first example, if someone has the intention of eventually retiring in Florida, they could begin moving their investment real estate to the area several years in advance of their retirement. After holding the properties as assets for a few years, they could then elect to make one of those properties their primary residence. No taxes are triggered unless they actually sell that property in the future. Even though the property is sold as a primary residence, there will still be some tax implications due to the fact that the real estate was previously acquired as part of a 1031 exchange. But, you can see why this option is one of the sweetest advantages of 1031 exchanges.
3. The chance to diversify the real estate investments in your portfolio. Many people have the misconception that in order to successfully complete a 1031 exchange, they have acquire the same type of property as the one they are selling. In other words, they assume that if they sell an apartment building, they have to buy another apartment building in order to do the exchange. That is not the case! This is another one of the great advantages of 1031 exchanges! All real estate qualifies, as long as it is held for investment or business use. This means you can exchange vacant land for an apartment building, or residential property for commercial property. This unique ability of exchanging offers the taxpayer a number of possibilities to diversify their existing real estate portfolio.
The advantages of 1031 exchanges are truly a gift to the real estate investor. A little planning can go a long way!
Want to learn more? Download our free 1031 Exchanges Made Easy guide!
If you have additional questions about these transactions, contact Midland IRA & 1031 today.