If you’re keen on growing your wealth while investing in the commercial real estate sector, make property exchanges a part of your strategy. You get to take advantage of free money from the government in the process.
For the uninitiated, taking part in a 1031 exchange in Nevada might not seem like a great idea. But you would be wrong to make such an assumption, especially when you’re an investor in commercial real estate. Recognizing that the population is growing at a high rate, the government is looking for ways to ease the housing shortage.
You Get Free Money
One of the most significant benefits of taking part in a 1031 property exchange is the ability to sidestep the taxman. You get to hang on to your capital gains without falling out with the IRS. Depending on your tax brackets that amounts to savings of up to 40 percent.
The IRS lets you hang on to all your gains on the condition that you commit every last cent of the sales proceeds to buy another property. In essence, you’ll be swapping one property for another. But other added benefits make the property exchange a useful and smart business move.
You Get to Upgrade
Once the IRS gives the okay to take part in a property exchange, you’re on a tight leash. You have 180 calendar days to seal the deal. You’ll have 45 days to identify up to three replacement properties and the remaining 135 days to seal the deal. Within this time frame, you need to sell your current holding and buy the replacement property. But it’s all worth it in the end.
One of the provisions of the 1031 property exchange is that the replacement property can be valued twice as much as the property you’re selling. If your sales proceed amount to $1 million, the replacement property or properties should not be worth more than $2 million. Deferring capital gains leaves you in a better financial situation as you’ll start with more significant equity on the new property. Best of all, you can buy multiple properties as long as their total value is capped at $2 million.
You Can Diversify Your Holdings
Not all real estate properties are equal, and smart investors know this when making a purchase. Taking part in a property exchange lets you diversify your real estate portfolio. Any property that has a commercial use is up for grabs as long as it falls within the price guidelines. You can dispose of a block of apartments and acquire an office complex, a warehouse facility, and a piece of agricultural land.
Other than diversifying your holdings, you can also trade up in the value of the property. Naturally, properties in prime locations command better rental rates translating into a higher income for you. That means you can escape a lousy market and pursue those that promise higher returns on investment.
When it comes to investing in commercial real estate, the government has your best interest at heart. Under Section 1031 of the Tax Code, the IRS lets you defer capital gains as long as you put back the sales proceeds into the commercial real estate sector. Seizing this opportunity can help you grow your wealth quickly.