The most important advantage of a 1031 exchange is that you can defer all capital gains indefinitely. No limit is placed on the number of such exchanges in your lifetime. An investor can easily start out with a small rental property and regularly “1031 exchange” it for larger properties, eventually leading to a substantial retirement income.
As long as you never sell an investment property without exchanging it for another, you’ll never have to pay taxes on your real estate capital during your lifetime. When you die, your heirs may even be entitled to receive a stepped-up basis on your investment property and escape paying taxes on the capital gains you deferred throughout your life.
Another popular advantage of a 1031 exchange is trading up. There are two types:
1) Buying a bigger property or increasing the overall amount of your real estate investment.
2) Buying a higher-quality property.
Leveraging is another way to take advantage of a 1031 exchange. It’s simply the idea of putting as little of your own money as possible down on a property, and maximizing the financing. It’s a strategy that works great in an up market, but can be disastrous in a down: if the property is too highly leveraged, the rental income will never support the debt.
It’s also possible to use a 1031 exchange to buy a larger or more valuable property for the additional depreciation. The adjusted basis of the relinquished property, however, will transfer to the replacement property. That means the replacement property only provides additional depreciation for the amount of value beyond the market value of the relinquished property.
1031 exchanges can simply be used to lighten one’s workload. If you own a high-maintenance property with lots of turnover, you may prefer to exchange it for something with lower turnover and maintenance requirements.
If necessary, you can always use a 1031 exchange to relocate an investment nearer to you. This can come in handy if you’re forced to move for any reason (but it only works for property inside theU.S.). 1031 exchanges are also known as “like-kind exchanges” because you have the option of using them for more than just real estate. You can exchange many business and investment capital assets for like-kind property, such as aircraft, boats, trucks or even livestock – the only catch is that they always have to be traded for the exact same kind of property. Real estate can be exchanged for just about any other kind of real estate – as long as it’s used for business. A primary residence, a vacation home, or a second home, for instance, can’t be used in a 1031 exchange.
Please note that this Scottsdale Real Estate Blog is for informational purposes and not intended to take the place of a licensed Scottsdale Real Estate Agent. The Szabo Group offers first class real estate services to clients in the Scottsdale Greater Phoenix Metropolitan Area in the buying and selling of the best Luxury homes in Arizona. Award winning Realtors and Re/MAX top producers and best real estate agent for Luxury Homes in Scottsdale, The Szabo group delivers experience, knowledge, dedication and proven results. Contact Joe Szabo at 480.688.2020, info@ScottsdaleRealEstateTeam.com or visit www.scottsdalerealestateteam.com to find out more about Scottsdale Homes forSale and Estates forSale inScottsdale and to search the Scottsdale MLS for Scottsdale Home Listings.