There is no doubt that selling out a depreciated or old property can save you from the burden of managing it. However, is it really the best option for you? Well, it isn’t. There is a reason why we’re saying this. When you sell a property, all you get is the fair market value of the property, which can be taxed as per normal tax laws. Therefore, a portion of your proceeds is wasted on the taxes and you can’t reinvest entire proceeds for buying new properties. However, if you do a 1031 Exchange, then you can acquire new property without any tax consequences. Yes, that’s true. Section 1031 of IRC allows investors to defer capital gains taxes on exchanging like-kind properties.
How exchanging out your property using a 1031 Exchange is better than selling it out?
In order to see how beneficial a 1031 Exchange is, let’s consider two scenarios. Suppose you’re selling out your property and not exchanging it. On account of closing on the sale of your property, you got $400k. Now since you’ve obtained the cash from your sale, it will be taxed by the federal government. Let’s assume the tax to be 20%. Plus the closing cost that you pay, say $20K. Therefore, at the end of the sale, all you’re left with is ($400k- $80K-$20K) = ($300K). Now, even though your property worth $400K, you get $300K after deductions.
On the other hand, if you exchange out your property using a 1031 Exchange, then you won’t have to pay capital gains taxes. In that scenario, upon closing on the sale of your relinquished property, you’ll be left with ($400K-$20K) = ($380K). Clearly, in this case, you have more proceeds to invest in the replacement property. As in case of a 1031 Exchange you get to spend more on the replacement property, the return is likely to be greater as well. Overall, you get following benefits upon exchanging out your property for another instead of selling it:
- More proceeds to invest in the replacement property.
- A depreciated property can be exchanged for a new one.
- A Qualified Intermediary will be there to carry out the transaction on your behalf.
- Since 1031 Exchange investors can acquire properties anywhere in the entire USA, you can look out for replacement properties that are located at prime locations.
- As more proceeds can be reinvested in the replacement property, the returns are likely to be greater than what it would be in case you sell your property.
1031 Exchange investors always have an upper hand over other investors as they aren’t exposed to tax consequences. In the end, they invest more and earn more. Therefore, if you haven’t decided anything on 1031 Exchanges, then it’s time to take the final call, and we can help you in this. For consultation and assistance regarding 1031 exchanges, you can call – 888-993-2835 or email us at info@1031Xchange.com