What Are the Benefits of the 1031 Exchange?

Los Angeles + Orange County Real Estate Podcast with Alfie McFadden

Today we're talking all about investment properties and the 1031 exchange. This tax code allows you to reinvest proceeds from the sale of an investment property into a more lucrative investment while deferring capital gains tax.

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Recently, I received a great question that I wanted to address from a financial advisor who has a lot of clients asking him about the 1031 exchange.

The best way to explain what a 1031 exchange is would be to give you a live example. The 1031 exchange is selling an investment property and moving the proceeds of the sale into another investment property and deferring the taxes. You're making your money work for you rather than being taxed one-third of that money.

I currently have friend and client with an investment property we're helping sell. By using the 1031 exchange tax code, we're able to use 100% of the proceeds of that sale to buy another investment property. In his case, that's an apartment building. He's tripling his gross income with the building he's buying while deferring capital gains taxes at the same time.

Another client of ours has owned an investment property for a long time, but she's thinking about selling it to pay for her daughter's college. One strategy she could use is to sell her current investment property and buy two smaller units — one close to her that she can easily manage and another that is close to her daughter’s college. Essentially, her daughter will be one of her tenants.

She will have two investment properties providing income and cash flow, and by the time her daughter graduates from college, the home may have appreciated enough for her to once again take advantage of the 1031 exchange.

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You're making your money work for you and deferring capital gains tax.

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Now, each individual has a different situation when it comes to investment property and the 1031 exchange. You want to be sure to talk to your CPA or tax preparer to ensure you're doing the right thing and, more importantly, talk to your real estate professional.

If you have any questions for me as a real estate professional about investment properties and the 1031 exchange, give me a call or shoot me an email. I'd love to hear from you!