Section 1031 of the Internal Revenue Code contains arguably one of the most powerful provisions of the tax code for real estate investors… the 1031 tax exchange. Many highly successful real estate investors have used this tax code provision in combination with aggressive pyramiding and upgrading strategies to amass huge investment property portfolios. Here’s how it works:
A Section 1031 Exchange allows you to exchange “like-kind” investment properties without triggering the payment of capital gains tax. As your property assets appreciate in value you have the ability to upgrade into larger properties with greater cash flow. Section 1031 also gives you the flexibility to exchange your rental properties that have appreciated in value in hot markets, and re-invest into lesser-known areas that are expected to develop and become the next hot market in years to come. You can continuously defer these capital gains taxes as you continue to pyramid your property investment portfolio into larger and larger properties.
1031 EXCHANGE BENEFITS
There are a lot of benefits to considering the use of a 1031 exchange:
TAX DEFERRED INVESTING
INCREASE CASH FLOW
TIMING THE MARKET
If you are stepping up your portfolio through a series of exchanges over time your full capital gain can be re-invested without tax consequence, resulting in accelerated equity accumulation.