1031 Loan: The Smart Way To Grow An Investment
Did you know that if you own an investment property, you can swap it out for another one and defer the capital gains tax through a 1031 exchange? It’s a great way to acquire a more valuable California investment property, or even consolidate multiple properties, without immediately owing taxes.
Why a 1031 Exchange Makes Sense
Get a tax advantage—defer the capital gains tax you’d otherwise pay if selling and buying.
Increase Your Cash Flow
Exchange a property that isn’t generating income for one that has a positive cash flow.
Free Up Capital
Leverage the proceeds of a 1031 exchange to invest in other assets or improve a property.
Exchange multiple properties for a single, higher-value property that’ll make you more money.
What Are the Requirements?
First, the investment property you acquire in the exchange must be both like-kind and of equal or greater value. And second, any of the sale proceeds must be invested (you can’t pocket the extra cash). Here’s who can qualify for a 1031 exchange:
- C corporations
- S corporations
- Partnerships (general or limited)
- Limited liability companies
- Any other taxpaying entity
Frequently Asked Questions
WHAT IS A 1031 LOAN, OR 1031 EXCHANGE?
A 1031 exchange refers to the sale of one investment property and the purchase of another. When you follow the IRS rules for the swap, you can defer taxes on capital gains
HOW DOES A 1031 EXCHANGE WORK?
Both investments have to be “like-kind” (similar in nature). For example, real estate such as houses, buildings, vacant lots, etc., are like-kind investments that you can exchange. Your new acquisition must also be of equal or greater value than your existing investment.
How Exchanges Are Structured
Depending on your situation, there are four ways to structure an exchange:
- Simultaneous Exchange: Buying and selling at, or very close to, the same time
- Delayed Exchange: Buying and selling within 180 days
- Reverse Exchange: Buy first, sell later
- Construction or Improvement Exchange: Typically used when vacant, underdeveloped land is acquired
WHAT IS THE BENEFIT OF A 1031 EXCHANGE VS. SELLING A PROPERTY?
When you sell an investment property you’re required to pay a capital gains tax, which eats into your sale profit.
The benefit of a 1031 exchange is that it allows you to sell an investment property, buy another one and defer the capital gains tax. The tax would only be due when you sell the property.
The result is that you get to keep more of the sale profit, which you’re required to reinvest in order to gain the advantage of the deferred capital gains tax.
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